HE 1071 
.V35 



Railroad Valuation 

Vanderblue 







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Class _BJLJA2i 
Book_ .V '5 5 



COHBIGKT DEPOSIT. 



Railroad Valuation by the 

Interstate Commerce 

Commission 



by 

Homer B. Vanderblue, Ph.D. 

Associate Professor of Transportation in Northivestern University 




Cambridge 

Harvard University Press 

1920 






REPRINTED FROM 

THE QUARTERLY JOURNAL OF ECONOMICS 

Vol. XXXIV, Novembeb, 1919; Febbuabt, 1920 

COPYRIGHT 1919. 1920 
BY HAKVARD UNIVERSITY 



JAN 22 1921 
g)CI,A608125 



■If. 



CONTENTS 

Introductory Note: 

Valuation Provisions of the Transportation Act, 1920 .... 1 

Railroad Valuation by the Interstate Commerce Commis- 
sion 7 

Appendix: 

Text of the Valuation Section (19a) of the Interstate Commerce 
Act of 1913 112 

Index 118 



^^ 



INTRODUCTORY NOTE 



VALUATION PROVISIONS OF THE TRANSPOR- 
TATION ACT, 1920 

The Transportation Act of 1920 recognizes the dual 
problems involved in fixing railroad rates. ^ The Inter- 
state Commerce Commission is granted " reasonable 
latitude to modify or adjust any particular rate which it 
finds unjust or unreasonable." But the significant con- 
tribution of the new act is the standard directed for 
measuring total income : 

In the exercise of its power to prescribe just and reasonable rates, 
the Commission shall initiate, modify, establish or adjust such rates 
so that carriers as a whole (or as a whole in each of such rate groups 
or territories as the Commission may from time to time designate) 
will, under honest, efficient and economical management and reason- 
able expenditures for maintenance of way, structures and equip- 
ment, earn an aggregate annual net railway operating income equal, 
as nearly as may be, to a fair return upon the aggregate valve of 
the railway property of such carriers held for and used in the service 
of transportation. 

From a rule of negation designed to protect the rail- 
roads from ^' confiscation " an affirmative program has 
been evolved. This directs a conscious effort to regulate 
total railroad earnings. Heretofore it has been the ^^ rea- 
sonableness " of individual rates that has received the 
burden of emphasis in the opinions of the Interstate 

1 This discussion of the Cummins-Esch Bill is based upon House Report 650, 66th 
Congress, 2d Session. The Valuation section of the new act will appear as Sec. 15a 
of the Interstate Commerce Act; it is Sec. 422 of the Conference Bill as 

1 



Commerce Commission.^ But the doctrine written into 
the Interstate Commerce Act by the provisions of the 
Amendment of 1920 goes beyond the common law doc- 
trine of rate reasonableness recognized in the original 
Act of 1887. It goes beyond the very doctrine of con- 
stitutional law upon which it is based. When Justice 
Harlan in 1898 declared that " the company is entitled 
to ask ... a fair return upon the value of that which 
it employs for the pubhc convenience," " he sought only 
to guarantee a minimum. The Act of 1920, using the 
'^ fair return upon value " formula directs the estabhsh- 
ment of schedules with the frank aim of hmiting maxi- 
mum revenue. In short, it seeks to secure for the pubhc 
a part of any future " imeamed increments " which may 
accrue in railroad earnings. 



For the two years follo^ving March 1, 1920, the Act 
directs that the Commission shall take, as the total fair 
return to all carriers, a sum equal to 5 J per cent of the 
aggregate value of the transportation properties of all 
carriers. The Commission may, however, ^^ in its dis- 
cretion," add to this amount an additional one-half per 
cent to provide improvements, betterments or equip- 
ment (presumably so-called ^' unproductive improve- 
ments "), properly chargeable to capital account. This 
mandate of Congress governs only for two years follow- 
ing the return of the roads to their private owners. 
Thereafter the '' legislative discretion " is delegated to 

1 See the discussion in the writer's Railroad Valuation, pp. 1-7, in the cases there 
cited, and in the Fifteen Per Cent case, 45 I. C. C. 303. 

* Smj'th V. Ames, 169 U. S. 466, 546. The ^Mississippi statute of 1884 which came 
before the Court in Stone v. Farmers' Loan & Trust Co., 116 U. S. 307, 309, directed the 
State Railroad Commission to revise the carriers' tariffs, permitting " a fair and just 
return on the value of such railroads, its appurtenances, and eqmpment." The Cali- 
fornia statute directing local bodies regulating water rates to " estimate, as nearly as 
may be, the value," etc., was identified by Jvistice Holm^ with the value rule of the 
Supreme Court. San Diego Land & Town Co. v. Jasper, 189 U. S. 439, 442. 



the Commission: the Commission will determine and 
publish the percentage which shall constitute the '^ fair 
rate of return." ^ 

By the device of thromng all the carriers into one big 
basket, the problem of determining upon a fair rate of 
return for each carrier is avoided. The theory of the act 
would seem to be, however, that there is one single fair 
rate of return which should be apphed to all carriers 
alike, any amount above this rate being in excess of a 
fair return. 2 The Act provides that a percentage once 
fixed shall be uniform for all rate groups or territories 
designated by the Commission. The same standard is 
invoked in the rules established to govern the action 
of the Commission in its study of the problem of 
consohdating the railways into a limited number of 
systems: . 

The several systems shall be so arranged that the cost of trans- 1 
portation as between competitive systems and as related to the I 
values of the properties through which the service is rendered shall I 
be the same so far as practicable, so that these systems can employ/ 
uniform rates in the movement of competitive traffic, and, underf 
efficient management, earn substantially the same rate of returii, 
upon the value of their respective railway properties. * 



1 For the distinction between the legislative and judicial view points see Minnesota 
Rate cases, 230 U. S. 352, 432; and the fuller discussion in Knoxville v. Knoxville Water 
Co., 212 U. S. 1, 16; WiUcox v. Consolidated Gas Co., 212 U. S. 19, 41; Louisville v. 
Cumberland T. & T. Co., 225 U. S. 430, 436; L. & N. R. R. Co. v. Garrett, 231 U. S. 
299, 313. It is in the latter case that the phrase " legislative discretion " is used. 

2 This attitude is reflected in the following language of the new Act (par. 5 of Sec. 
422): 

" Inasmuch as it is impossible (without regulation and control in the interest of the 
commerce of the United States considered as a whole) to establish uniform rates upon 
competitive traffic which will adequately sustain all the carriers which are engaged in 
such traffic and which are indispensable to the communities to which they render the 
service of transportation, without enabUng some of such carriers to receive a net railway 
operating income substantially and unreasonably in excess of a fair return upon the value 
of their railway property held for and used in the service of transportation, It is Here- 
by Declaked that any carrier which receives such an income so in excess of a fair return, 
shall hold such part of the excess, as hereinafter prescribed, as trustee for, and shall pay 
it to the United States." 

^ Transportation Act of 1920, Sec. 407, amending Sec. 5 of the Interstate Commerce 
Act. 



But until such consolidations can be effected, it is ex- 
pected that different rates of return will accrue to in- 
dividual carriers. Given equal competitive rates (and 
the new Act recognizes that uniform rates on competi- 
tive traffic are inevitable) gross earnings will continue to 
reflect relative traffic density. Operating conditions will 
govern operating expense. The differential advantages 
possessed by the Union Pacific over its competitor the 
Rio Grande — to use an obvious example — will con- 
tinue, imtil absorbed through consohdation. 

One-half of the excess over 6 per cent of the value of 
any individual hne or system, the Act leaves with the 
carrier. This 6 per cent figure, in the present state of the 
Act, is a standard, regardless of ^ny action of the Com- 
mission in subsequently estabhshing a fair rate of return 
above or below this figure. The other half of the excess 
must be retained by the carrier as a reserve, until the 
accumulation equals 5 per cent of the value of the prop- 
erty. ^ Thereafter the carrier may use its half for ^' any 
lawful purpose.'' Presumably, tho on this subject the 
Act is silent, if reinvested in plant, as, for example, if 
spent for double tracking, enlarging tunnels, or ehminat- 
ing curvature, the amounts so " put back into the prop- 
erty " will receive recognition in the value figure. 

The other half of any excess above 6 per cent the car- 
rier will pay into a ^' revolving fund," the property of 
the United States administered by the Commission. 
This " general railroad contingent fund " will be loaned 
to carriers for new capital expenditures or for refund- 
ing maturing obligations, or will be expended for equip- 
ment and facihties to be leased subsequently to the 
railroads. 

^ Only for the purpose of paying interest, dividends, or rentals may a carrier draw on 
this reserve, and then only to the extent that its net railway operating income for any 
year is less than a sum equal to 6 per cent of the property value. 



The Transportation Act does not define value, nor 
does it dictate how value shall be determined. '' Aggre- 
gate value " and not '' fair value " is the phrase used. 
Admonitions of a general character the Act does con- 
tain. The Commission is directed to give " due con- 
sideration to all the elements of value recognized by the 
law of the land for rate making purposes/' and it is ad- 
jured to give to the property investment account " only 
that consideration which under such law it is entitled to 
in estabhshing values for rate making purposes." And 
there is specific language that, when value has been 
^' finally '' ascertained under the provisions of the Val- 
uation Act of 1913, '' the value so ascertained shall be 
deemed by the Comimission to be the value ... for the 
purpose of determining . . . aggregate value." This 
figure of aggregate value, the Commission will deter- 
mine " from time to time and as often as may be neces- 
sary." In the calculation of the rate levels for 1920-22, 
the Act contemplates that the Commission will utiHze 
its investigations under the Valuation Act '' in so far as 
deemed by it available." 

Thus two distinct tasks bearing upon the valuation 
problem are placed with the Conomission by the Trans- 
portation Act of 1920. One, that of fixing the rate of 
return need cause no present concern: 5|-6 per cent is 
provided for two years. But the other, that of finding 
^^ value," demands immediate attention. A figure of 
value, however determined, is prerequisite to the apph- 
cation of the '' fair return on value " doctrine. What- 
ever uncertainty there may have been concerning the 
intention of Congress in passing the Valuation Act, there 
need be no present doubt: the Commission must pro- 
ceed to the task of fixing ^' final value." ^ The subse- 

1 See the discussion below, p. 8, note 2. 

On January 7-9, 1920, the Commission heard arguments on Value, in which Director 
Prouty, Mr. Farrell, the Commission, counsel for the State Commissions, the Carriers, 



6 

quent discussion is an analysis of the investigation 
made under the provisions of the Valuation Amend- 
ment which appears as Section 19a of the Interstate 
Commerce Act.^ 

and the Raikoad Brotherhoods discussed the theory of " raiboad valuation." The Car- 
rier Brief then filed does not contain the " minimum value " doctrine which is criticized 
below, p. 99. In other essentials the carrier attitude is substantially that here pre- 
sented. For the arguments in detail, see Hearings, January, 1920, published by the 
Secretary, Presidents' Conference Committee. The various printed transcripts so 
published are here cited as " Hearings." 
1 See Appendix. 



RAILROAD VALUATION BY THE INTERSTATE 
COMMERCE COMMISSION 

SUMMARY 

Introduction: Progress of the Interstate Commerce Commission 
Valuations, 7. — I. The Commission's Reproduction H5rpothesis, 10. — 
The reproduction program, 11. — Topographical conditions, 16. — Con- 
tingencies, 19. — II. Cost of Reproduction, 22. — Organization of the 
work, 24. — Basis of the inventory, 25. — Estimates and errors, 26. — 
Unit prices, 29. — Commission procedure, 32. — Expert testimony, 32. 

— " Overhead charges," 33. — Interest during construction, 37. — III. 
Depreciation, 39. — Second hand materials, 40. — Obsolescence or 
" functional depreciation," 40. — Observation and estimate, 42. — De- 
ferred maintenance as depreciation, 45. — Capacity for service, 47. — 
Maintenance as investment, 49. — IV. Land, 52. — Present value of 
land, 53. — Commission procedure, 54. — Texas Midland controversy, 
55. — Land valuation and condemnation practice, 60. — Hypothetical 
cost of reacquiring land, 63. — Minnesota Rate cases on land valuation, 
64. — " Railway value," 66. — Value and cost, 68. — The unearned in- 
crement, earnings and value, 70. — V. Cost. Facts and estimates, 72. 

— Commission procedure, 73. — Renewals and costs, 74. — Appre- 
ciation, 78. — Original cost determined by appraisal, 81. — Facts and 
estimates once more, 82. — VI. Intangibles. Commission doctrine, 
83. — Franchise value, 84. — Going value and strategic value, 85. — 
Wisconsin deficit theory, 88. — VII. Final value, 89. — Confiscation 
and condenmation, 89. — Exchange value, 90. — CapitaUzation of 
earnings, 92. — The general rate structure, 95. — The reasonable 
return as a variable, 96. — The appeal to authority, 100. — Cost of 
reproduction as a basic fact, 101. — Land once more, 102. — Cost of 
reproduction and investment, 105. — The rule in Smyth v. Ames, 109. 

— The Commission and " final value," 110. 

The skeptic who characterized the Railroad Valua- 
tion Amendment to the Interstate Commerce Act as 
legislation which directed an attempt to achieve the 
impossible, has, prima facie, been discomfited. Tenta- 



tive valuations have been served on fifty-five carriers; 
extensive hearings have been held; and, for the Texas 
Midland, the Winston-Salem Southbound, and the 
Kansas City Southern roads, formal findings and orders 
as to '' basic facts '' have been pubhshed.^ The field 
work in the engineering section has been ^' substan- 
tially'' completed, and that in the land and accounting 
sections will be well advanced toward completion by 
the end of 1920. Within the next two years it is 
"hoped" that complete data will be available upon 
" most railway systems of significance." ^ 

But in none of the tentative valuations has a single 
sum been set as the " value " of the carrier's property. 
Indeed, the tentative valuations do not, strictly speak- 
ing, contain figures of " value " at all. There is a sum- 
mary of " cost of reproduction new " and of " cost of 
reproduction less depreciation " of the railroad plant 
(excluding land); of the " present value " of land; and 
of original cost, where data were found. But there is no 
figure purporting to represent the " value " of the rail- 
road. Such a figure the Commission now promises ulti- 
mately to fix, tho recognizing that the Act might be 
interpreted to eliminate that responsibility. ^ 

1 Texas Midland Railroad, 1 Valuation Reports of the Interstate Commerce Com- 
mission (Val. Rep.), 1; Winston-Salem Southbound Railway, 1 Val. Rep. 187; Kansas 
City Southern Railway, 1 Val. Rep. 223. In the Kansas City Southern case, Commis- 
sioners Aitchison and Eastman did not participate, and Commissioners Daniels and 
Hall dissented, indicating substantial differences of opinion. Pp. 266-274. The Texas 
Midland opinion describes the methods and theories of the Commission in extenso, and 
parallel issues appearing in the Winston-Salem Southbound and Kansas City Southern 
cases are decided by reference to the stand taken in the preliminary and test case. 

2 M. morandum on Final Value, filed by Director Prouty of the Bureau of Valiia- 
tion after the Hearing of January, 1920, upon that subject, p. 2. See also Thirty- 
third Annual Report of the Interstate Commerce Commission (1919), p. 51. 

3 Texas Midland, 1 Val. Rep. 1, 6; Winston-Salem Southbound, 1 Val. Rep. 187, 
189; Kansas City Southern, 1 Val. Rep. 223, 229. 

The decision ultimately to make a finding of " value " upheld the contention of the 
attorneys for the carriers, see Texas Midland Brief of Pierce Butler and Leslie Craven, 
August 1, 1917 (hereafter cited as Texas Midland Brief), p. 31 and following; but com- 



The Texas Midland opinion contains the assurance, 
however, that all of the " basic facts '^ upon which a 
judgment is to be formed are before the Commission, 
and that the issues as to these are " wholly independ- 
ent " of what should be deduced from them. There now 
remains '^ but the one step of deducing from the facts 
stated the sum to be found." And, in the meantime, 
the " basic facts " shown in the tentative valuations 
(with minor corrections) are made '' final." ^ In the 
Winston-Salem Southbound case, the Commission cites 
its previous opinion and makes findings of '' underlying 
facts," upon which it promises ultimately to state '^ a 

pare Atlanta, Birmingham and Atlantic Brief of W. G. Brantley, December 1, 1917, 
(the A., B. & A. Brief), p. 11 and following, for a compromise point of view; the Kansas 
City Southern Brief of Samuel Untermeyer, S. W. Moore, and J. M. Souby (the Kansas 
City Southern Brief), p. 3 and their Reply Brief, p. 5; and overruled the conten- 
tion of Mr. FarreU, the Bureau of Valuation's solicitor (Brief in the Texas Midland 
Case, p. 1 and following), and of Commissioner Aitchison, formerly solicitor for the 
Nat'l Ass'n Ry. Com'rs, Brief, pp. 10-15 and following. 

The issue was simply one of interpretation of the act, and the basis of the difference 
of interpretation can be explained only in terms of the act. The railroads based their 
claim for the finding of such a sum on the words contained in the title of the act, " pro- 
viding for a valuation of the several classes of property," and upon the presence of the 
word " whole " in the seventh paragraph as indicated below. The argument of Mr. 
Farrell (and in substance his argument follows that previously advanced by the Cali- 
fornia Railroad Commission, Brief on Fundamental Principles, pp. 11-13, and Mr. Max 
Thelen, of that body. Hearings, January, 1916, pp. 7-23) looked also to the language of 
the act. The first paragraph provides " that the Commission shall, as hereinafter pro- 
vided, investigate, ascertain and report the value of all the property owned or used by 
every common carrier. ..." The significant words are here held to be the qualifying 
phrase, " as hereinafter provided," since the following paragraph requires the Commis- 
sion to ascertain and report the three " cost values ": cost of reproduction new, cost of 
production less depreciation, and original cost to date. A separate paragraph, de- 
voted to land, directed a report of " the original cost of all lands . . . and the present 
value . . . and separately the original and present cost of condemnation ... in excess 
of such original cost or present value." The seventh paragraph then reads, " such inves- 
tigation shall show the value of the property of every common carrier as a whole and 
separately the value of its property in each of the several states, . . . classified and in 
detail as herein required." The carriers contended that the final clause, " classified and 
in detail as herein required," etc., did not modify the phrase, " as a whole "; Mr. Far- 
rell and Mr. Aitchison insisted that the phrase did so serve as a modifier, and that, taken 
in connection with the same words in the first paragraph, and the classification of " cost 
values," etc., the requirement of the act was met, when such figiires were reported. 

1 1 Val. Rep. 1, 6. But in his dissent to the Kansas City Southern opinion. Com- 
missioner HaU says: " With much in this report I am in accord, but, even with the 
reservations which it contains as to fiirther finding of ' single value,' I am not persuaded 
that it reports aU the facts of substance which we are required by the valuation act to 
report or amounts to a substantial compliance therewith." 1 Val. Rep. 223, 266. 



10 

single sum as the value of the common carrier property 
. . . for purposes under the act to regulate commerce/^ ^ 
And what are these " basic underlying facts ? " As 
made final by the Commission, they include, in addition 
to the '^ cost values '' (cost of reproduction new, and less 
depreciation, and original cost to date) and the " present 
value " of land, a statement of the corporate and 
financial history, a rewritten income account, and a 
description, in general terms, of traffic possibiHties and 
operating conditions.^ Surely this is a sufficient array 
of " facts '^ to satisfy the requirement of the rule in 
Smyth i^. Ames — even to the ^^ saving" clause: ''we 
do not say that there may not be other matters to be 
regarded in estimating the value of the property." ^ 

I. The Commission's Reproduction Hypothesis 

The tentative valuations contain figures of cost of 
reproduction.^ The totals of the first half dozen follow : 

Reproduction new Less depreciation 
Railroad except land except land 

Texas Midland 3,360,053 2,509,209 

Winston-Salem S. B 5,121,188 4,753,006 

A., B. & A 24,154,998 19,408,810 

K. C. Southern 46,274,363 38,258,909 

N. 0., T. & M 8,865,636 7,572,886 

E., J. & E 13,742,023 11,057,598 

1 1 Val. Rep. 187, 188. See also Kansas City Southern, 1 Val. Rep. 223, 229. 

* See the Commission's formal orders, Texas Midland, 1 Val. Rep. 1, 73, 80; Wins- 
ton-Salem Southbound, 1 Val. Rep. 187, 202; Kansas City Southern, 1 Val. Rep. 223, 
275. The Engineering, Land and Accounting Reports are by reference made part of 
these orders. Texas Midland, p. 79; Winston-Salem Southbound, p. 206; Kansas City 
Southern, p. 321. The Railway Age Gazette was gratified " that the bill passed by 
Congress seems to provide fully for a valuation that shall include all important factors." 
Vol. 54, p. 421. 

' 169 U. S. 466, 546. See the writer's Railroad Valuation (hereafter cited as Rail- 
road Valuation), pp. 15-23. The present study brings to date (March 15, 1920) the 
discussion of that vol;ime. Where, therefore, the present argument can be abridged, 
reference to the discussion contained therein is given in the footnotes, the aim being to 
avoid duplication. 

* The following is an interesting paragraph from Mr. Brantley: 

" The consuming love of accuracy which seemingly now controls the view of those 
opposing the cost of reproduction method for determining the value of carrier lands . . . 



11 

An understanding of the governing hypothesis and of 
the methods of arriving at these figures is essential 
before a judgment as to their possible usefulness in the 
determination of " value " can be expressed. 

Assuming the " mental obliteration '^ of the existing 
railroad (abandoned sections are not inventoried)/ 
what will be the cost of its " hypothetical reproduc- 
tion '^ 2 — " under present conditions, by present meth- 
ods, and at present prices ? " ^ The non-existence of 
the railroad is assumed, while all other conditions are 
taken as existent on valuation date.^ Only the railroad 
disappears. There shall then be a " rational conception 
of the process of reproduction." ^ 

is more than strange . . . because it overlooks the fact that there is scarcely a figure or 
statement in the tentative valuation of protestant's properties which is not a mere esti- 
mate, or in other words, the opinion of somebody." A., B. & A. Brief, p. 622. 

It may be said, however, that the Commission has recognized that cost of reproduc- 
tion is " at best an estimate." Texas Midland, 1 Val. Rep. 1, 16. 

» Texas Midland, 1 Val. Rep. 1, 54, 115; Kansas City Southern, ibid., pp. 223, 243. 

2 Prouty, Memorandum, Texas Midland Railroad, p. 9. 

» Ibid., p. 6. 

* " This method of estimating cost of reproduction new is attacked by the Minne- 
sota Railroad and Warehovise Commission as being within the prohibition announced 
... in the Minnesota Rate Cases. It is contended that this decision condemned any 
cost of reproduction new ascertained by an assumption of the nonexistence of the rail- 
road under valuation while at the same time assuming the existence of cities, industries, 
and other developments alongside the railroad. . . . 

The Minnesota commission further contends that we have construed the words 
'* cost of reproduction new " too literally; that " cost of reproduction new " is in reality 
a misnomer, and that what should be reported is inventory value at valuation date. In 
other words, we should ascertain the cost of the railroad property as it stands on valua- 
tion date without taking into consideration any expense which would be incurred by 
reason of the fact that it would have to be built. By applying this method to the instant 
case, it is asserted that the figure reported by us is too high by at least $630,151, or 
approximately 23 i>er cent. . . . We cannot accept the view." Texas Midland, 1 Val. 
Rep. 1, 11, 12. 

See the arguments of Messrs. Flannery and Elmquist; the former. Hearings, Decem- 
ber, 1917, pp. 76, 77, the latter. Hearings, January, 1917, p. 51. Asked by Commissioner 
Hall if there was not an element of fiction in assuming construction to take place 
over night, Mr. Elmquist said: "There is not going to be any reconstruction." Ibid., 
p. 305. 

8 Texas Midland, 1 Val. Rep. 1, 54. Mr. Aitchison, Brief for the Nat'l Ass'n Ry. 
Com'rs, had called this " rational " process, '* the exercise of imagination in the realms 
of the transcendental." P. 82. 



12 

Such reproduction necessarily involves the securing 
of a charter ^ and the raising of the needed funds. For 
simpUcity it is assumed that the credit of all raihoads 
will be equally good.^ Engineering parties must be 
organized and placed in the field; but their task is a 
much simpler one than that faced by the original sur- 
veyors. For, through the coimtry side, and in the heart 
of the great city, there is a long stretch of vacant land, 
corresponding to the exact site now occupied by the 
railroad.^ Alongside, great industrial plants (dependent 
for their very life upon the presence of the railroad) 
continue to operate, receiving and delivering freight. 
But these plants do not encroach upon the right of way. 
If so, it would be less easy for the engineer who — in- 
stead of running preliminary surveys, indulging in " sup- 
posititious groping around the country " * — is to walk 
to the exact spot where the road now exists, and to 
stumble at once on the best route. It would seem hardly 
necessary for him to do more than verify the center 
line.^ His task is next to prepare what he conceives to 

1 Texas Midland, 1 Val. Rep. 1, 30. 

2 Ibid., p. 31. See Prouty, Memorandum, Texas Midland Railroad, p. 42, and 
especially Notes and Comments thereon by Messrs. Butler and Craven, p. 158, where it 
is indicated that such assumption is a departiu-e from a strict " reproduction " hypoth- 
esis. The credit of all railroads is not by any means the same ; nor would it be in the 
event of reproduction, unless the assumption be made that all other things are equal. 

These are hereafter cited as Prouty, Memorandum, and Notes and Comments. 

5 This holds true even tho, when the original line was constructed, buildings were 
wrecked. See Hearings, January, 1917, pp. 40-46; also A., B. & A. Brief, pp. 97, 98. 

* Mr. Aitchison, Brief for Nat'l Ass'n Ry. Com'rs, p. 101. 

' " The tentative valuation includes a sum of $9,200 for ' location engineering for a 
period of four months, at an average expense per month of $2,300.' The propriety of 
this inclusion is questioned by the valuation committee of the National Association of 
Railway and Utilities Commissioners, for the reason that it represents reconnaissance, 
an obvious conjectural expense incurred in supposititious groping through the country 
for locations which are not used. Such an expense, it is argued, should not be included 
in the reproduction cost of a raUroad, the exact location of which is known. In the con- 
struction of a new railroad it is necessary to reconnoiter, lay out lines, and engage in 
considerable preliminary work in order to secure the most advantageous route. Such a 
program is not necessary in a theoretical reproduction of a property imder valuation. 
The inclusion of an amoxmt to cover expenses of this character is incorrect. Cost of 
reproduction new is the cost of reproducing the existing line of railroad." Texas Mid- 
land, 1 Val. Rep. 1, 28. 



13 

be '^ the most practicable and economical program for 
the construction of the road.'' ^ 

In fixing upon this program, the engineer is not gov- 
erned by the history of the road : ^ — he is to assume 
that he is entering upon an entirely new venture, but 
one where the uncertainties faced in original construc- 
tion need not be faced.^ Tho actual construction began 
at the east end, he may begin at the west; ^ tho the 
original construction required four years, he may finish 
in three. ^ His problem is further simplified by the fact 
that he has at his command all existing means of trans- 
portation (except the road imder reproduction), whether 
or not the competing and connecting lines were in exist- 
ence when the road was built. The accident of owner- 
ship is therefore important. Had the Texas Midland 
been absorbed, say by the St. Louis Southwestern,^ the 
latter road would not, as now, be available to haul men 
and materials. Conceivably a different construction 
program, and a different cost of reproduction would 

1 Texas Midland, 1 Val. Rep. 1, 11. In its Kansas City Southern opinion the 
Commission said on this point: "An economical production of the property of the 
carrier would render imnecessary the excavation of this material in the same manner 
as it was excavated in original construction and for this reason it has no place in cost 
of reproduction new." 1 Val. Rep. 223, 244. 

2 An illustration appears in the Texas Midland opinion: 

" It often happens that the track was at first supported upon a timber trestle which 
later was filled. The existing structure is an embankment, which contains upon the 
inside the original trestle. In the inventorying of the property this is measured, com- 
puted, and priced as though it was simply an embankment, no reference whatever being 
made to the trestle. In applying the price the engineer inquires whether approved con- 
struction would require the erection of a temporary trestle from which the embankment 
would be built, or whether the embankment shoiild be constructed without the expense 
of such trestle, or so much of it as has not decayed. If good construction woiild require 
a temporary trestle, then proper allowance is made for the same; otherwise the price is 
determined as though no trestle had ever existed." P. 117. 

s Texas Midland, 1 Val. Rep. 1, 25, 143. 

* Comments on the Reproduction Cost New of the A., B. & A., E. M. Durham, 
Special Engineer, p. 20. 

6 Protest, N. C, T. & M., pp. 18-21; W.-S. S., pp. 11. 12; A., B. & A. pp. 13, 
25, etc. 

6 Or had the Winston-Salem Southboimd been built as a system line by either the 
Norfolk & Western, or the Atlantic Coast Line (the joint owners). 



14 

result.^ Likewise if the Pacific coast extension of the 
St. Paul had not been built, a different construction 
program for the Northern Pacific would be necessary, 
from the program now available. That line, extended as 
a pioneer, carried materials over its completed portion 
to the end of track. Now that the St. Paul is built, it 
can receive men and materials at many points along the 
line. And prosecution of the work simultaneously in 
many sections very much reduces the total construction 
period.2 

1 See the discussion of the imaginary " material yards." Hearings, December, 1917, 
pp. 79-85; Texas Midland Reply Brief, p. 321. The Commission's engiaeering pro- 
gram for the A., B. & A. is shown in Hearings, December, 1917, pp. 83, 84; for the Texas 
Midland, March, 1917, pp. 904-922. 

* 1 Val. Rep. 32, 139, 157. See Prouty, Memorandum, p. 44. The railroad repre- 
sentatives have not objected to the application of the hjrpothesis in these terms. Hear- 
ings, May, 1915, pp. 32, 39; Carrier Valuation Brief of 1915, pp. 35-47, 61, 62. 

Mr. Worley described the process of fixing upon a construction period for the Kansas 
City Southern in the following language: 

" The construction period on the Kansas City Southern was determined after careful 
study of all the facihties, the conditions of all the hues, other railways, the time that it 
had taken to construct the individual sections, and many other matters. We reached the 
determination by exactly the same processes that we used in reaching all these conclu- 
sions. I believe that this is as far as I can answer. We fixed three years approximately. 
. . . We made a careful study of all the raihoads along the Kansas City Southern, the 
facilities for getting in equipment and material, and all other related matters, made a 
study of the actual time consumed in constructing the various sections, and it seemed to 
us that the various sections could be constructed in a less period; that a three-year 
period was a fair period, and that is about the general study that was given that mat- 
ter. . . . We divided the road up into districts, you might say, in that we took each 
intersecting point where a foreign railroad touched the Kansas City Southern, and we 
ascertained the distance between that and the next railroad point, and we ascertained 
the average distance that it would have to go from each point for the center of grading 
activity. We assumed that construction work could be carried on from each of those 
points. We made our assumption on the basis that the facilities were there and work 
could be carried on from each of those points. We did not assume that a certain number 
of teams or a certain number of men were to be unloaded at that particular point on a 
particular day. We considered the facilities for doing the work, but not the chrono- 
logical order in which each mile would be done. We did not make a computation as to 
where each piece of work would begin. We did not make an analysis of where the work 
would begin at this town, or this block, or this road. We considered that the facilities 
were there and left the matter whether a particular contractor would begin at any 
particular station or not to his own discretion, if he wanted to consider it from that 
viewpoint. 

" I made a study of the time actually consumed in the original construction of the 
various sections of the road, and also for the construction of the whole road. 

' ' We had this information and it was studied from many angles. We ascertained the 
construction period of many other pieces of property and, as I recall, I t hink at one time 
early in the work we built up an entirely synthetical program, endeavoring to, and I do 



15 

The materials for reproduction come from the most 
available present som"ce/ altho Mr. Prouty indicated 
that if there was not enough sand in the pits of the Texas 
Midland properly to ballast the road, it would be as- 
sumed, '' for reproduction purposes,'' to have been put 
back.2 Ordinarily the reproduction is in kind, altho, for 
the A., B. & A., open hearth steel has been ''sub- 
stituted " for the Bessemer rail laid before the carrier 
had a Birmingham terminal,^ and for the Texas Mid- 
land, treated pine timbers have been '' substituted " 
for the unavailable bois d'arc.^ But relay rails are re- 
produced not "new," but as '' relay '';^ locomotives 
bought second hand are reproduced as " new " second 

not know how much weight that really had, but we tried to approach it from almost 
every angle, and our final conclusion was, as has been stated in the record, and we had 
this information as to the actual construction periods of these sections of the road of the 
Kansas City Southern as it was originally constructed and I think we gave some weight 
to that." Quoted, Reply Brief of Messrs. Farrell and Benton, p. 60, 

For Mr. Jones' basis fixing upon the construction period of the A., B. & A., see A., 
B. & A, Brief, p. 286 and following. 

* " It may have been thought necessary in the original construction of the road to 
bring material for a considerable distance in order to secure a proper foundation for the 
track. Since the construction of the property sources of supply have been developed 
from which material of substantially the same kind, although not identical, might be ob- 
tained at a much less expense. In such case the engineering inventory would enumerate 
material of the general kind which is found in the track, but the price would contem- 
plate the obtaining of that material from the less expensive source of supply and not 
from the original source." Texas Midland, 1 Val. Rep. 1, 117. 

2 A., B. & A. Brief, p. 626. Mr. Maltbie, speaking for the Nat'l Ass'n of Ry. 
Com'rs, Hearings, May, 1915, p. 98, proposed the use of the original sources of supply 
for gravel, ties and rails. Mr. Farrell even suggested the use of the material now in 
the railroad. " What," he asked, " is going to become of the material that is there 
now ? " (A., B. & A. Brief, p. 48) — what, indeed ? 

3 Diu-ham, Comments on the ... A., B, & A. " The Bessemer rail in use on the 
A., B. & A. was foimd to be more expensive, freight rates considered, than the open- 
hearth now to be had at Ensley," p. 24. 

* 1 Val. Rep. 1, 41. It was contended by Mr. Helm of Kansas that " since bois d'arc 
is indestructible and these piles are now in existence in bridges, they would be available 
for reproduction if the road were blotted out." Texas Midland Brief, p. 576. 

s 1 Val. Rep. 1, 43. At p. 35 the Commission had said: 

'• The property to be reproduced is the existing property as it was when it was put 
into its present service. When the records of the carrier clearly show that second hand 
materials were used the cost of reproduction new will be estimated for the same kind of 
materials in the same condition as when installed." 

See Kansas City Southern Brief, pp. 127-134, for extended exposition of carrier 
contention, which was overruled, Kansas City Southern, 1 Val. Rep. 223, 238. 



16 

hand locomotives. ^ And a locomotive crane, bought 
second hand by the Texas Midland, is " reproduced '' 
for actual cost plus the freight from Cleveland, Ohio, 
where the crane was manufactured, altho it had been 
purchased at a nearer point and the actual freight had 
been " less than that allowed. '^ ^ 

So also the present, and not the original, topographical 
conditions govern the reproduction. " If original con- 
ditions were to govern, data concerning the work done 
many years ago could not be obtained in many in- 
stances. . . . The amount reported . . . would be the 
result of speculation." ^ Therefore, the water-course 
which presented a problem at the time of original con- 
struction, but which (perhaps because of the change in 
drainage resulting from the building of the railroad) has 
since disappeared, presents no present difficulties. If a 
swamp has been drained, the present construction is 
through non-swampy land. And if the carrier itself, in 
order to avoid a double crossing of a stream at a bend, 
has dug a cutoff, that work is not a part of reproduction 
new.^ Nor is riprap protection against streams,^ or a 
public improvement located off the right of way, since 
neither " would not be interfered with by a removal of 
the railroad." ® If the pubUc improvement were wiped 

1 Texas Midland, 1 Val. Rep. 1, 86; see Protest, A., B. & A., p. 136. 

* Prouty, Memorandum, p. 82; see Texas Midland Brief, p. 646; and Texas Mid- 
land, 1 Val. Rep. 1, 46. The discussion represents an extreme example of the mixture of 
" cost " and " reproduction " concepts. Mr. Prouty insisted that " to apply other than 
a second hand price would unduly inflate the cost of reproduction new." Typewritten 
Record, p. 508. The crane had, as a matter of fact, been in use for less than a week at 
the time of the purchase by the railroad. Ibid., pp. 788, 801. 

» Texas Midland, 1 Val. Rep. 1, 16. 

* Ibid., pp. 115, 118. 

* Kansas City Southern Brief, pp. 175-178. See Hearings, May, 1915, pp. 38, 39 
But in the Kansas City Southern case, 1 Val. Rep. 223, 245, the Commission allowed 
riprap when " a necessary part of the property." 

« Farrell, Texas Midland Brief, p. 29; see Hearings, March, 1917, p. 57 and follow- 
ing. The tone of the discussion is indicated by the following excerpt: 



17 

out by the removal of the track, its cost of reproduction 
would be included. 1 

One relatively unimportant item, clearing and grub- 
bing, has given rise to considerable discussion, discus- 
sion quite out of proportion, indeed, to the financial 
interests at stake.^ The eastern section of the Atlanta, 
Birmingham and Atlantic was originally built through 
a pine forest, where the presence of the railroad made 
possible the lumbering operations which resulted in 
clearing the land now used for agriculture.^ Shall the 
right of way be considered as covered with the original 
forest, or shall it be taken as tillage land, similar to that 
adjacent ? Applying the doctrine of " theoretical re- 
production," the Commission has held that — in a case 
such as that cited for the A., B. & A. — " the amount of 
clearing and grubbHng which would be performed to- 
day . . . would be considerably less than that which 
was done in connection with original construction.'' * 
The rule of the Commission, approved as " involving 
the minimum of conjecture,'' is therefore to consider the 
right of way as in the same condition as adjacent land. 
If there are no trees on either side of the right of way, the 
latter is treated as similarly devoid of trees; if a forest 
adjoins, even tho, at the time of construction, the land 
was clear, a corresponding growth is assumed to be on 

Mr. Farrell: *' Now if the railroad were wiped out of existence would those public 
improvements be wiped out of existence also ? " 

Mr. Durham: " Why I cannot answer that question." 

Mr. Farrell: " Well just what seems to trouble you about answering that ques- 
tion ? " 

Mr. Durham: " As to what would happen if the railroad were wiped out of exiatence. 
I don't know." 

1 Texas Midland, 1 Val. Rep. 1, 19; but see Kansas City Southern, 1 Val. Rep. 223, 
239, 240. 

2 Texas Midland, 1 Val. Rep. 1, 14-16; Hearings, May, 1915, pp. 36, 37; January, 
1917, pp. 31-44; Texas Midland Brief, pp. 556-559; Prouty, Memorandum, pp. 68, 69; 
and Notes and Comments, pp. 13-23. 

» A., B. & A. Brief, pp. 96-100. 
« Texas Midland, 1 Val. Rep. 1. 14. 



18 

the right of way.^ The rule is made to work both ways 
— with the balance against the railroad. 

A seemingly obvious inconsistency emphasizes the 
artificiality of the reproduction hypothesis, which, it 
will be remembered, assumes that only the " obhter- 
ated '' raihoad is rendered non-existent. Both the 
Atlanta, Birmingham and Atlantic and the Winston- 
Salem Southbound are recent constructions. When 
crossing the tracks of an older road, the junior line 
usually bears the expense of providing the necessary 
bridge or interlocking plant. But on the theory that the 
Atlanta and West Point owns the bridge built by the 
A., B. & A., the cost of reproducing the bridge is omitted 
from the A., B. & A. figures.^ The Atlanta and West 

1 Texas Midland, 1 Val. Rep. 1, 16, quoted and followed, Kansas City Southern, 1 
Val. Rep. 223, 245. The theory of the Commission is justified in the foilowrng words 
by Mr. Farrell: 

" We have to proceed in a practical manner in estimating the cost of reproduction. 
If we cannot get in practically all cases the conditions which did exist when the raUroad 
was constructed it would be absolutely wrong, according to my view, to estimate the cost 
of reproduction new so far as clearing and grubbing is concerned, upon conditions which 
existed when the raUroad was constructed in any case, for this reason — we could not 
have uniformity. . . . 

" We have to be practical, ... we have to take present conditions which we can 
see, ... we cannot uniformly apply the estimate of the cost of reproducing clearing and 
grubbing unless we do it upon present day conditions." Hearings, January, 1917, p. 39. 

See also the further discussion, p. 40 and following. The attitude of the carriers is 
expressed by Mr. Brantley (p. 41): 

" There is but one way to keep the record straight to get away from imcertainties 
and speculations, and that is to take the record of how much work of this kind was done 
in the origiaal construction. ... It is equally a speculation to assume the non-exist- 
ence of the railroad and yet that the adjacent land is cleared land." 

2 A., B. & A. Brief, pp. 76, 239-245. 

The following from the Commission's opinion in the Winston-Salem Southbound 
case, 1 Val. Rep. 187, 193, states a parallel situation: 

" In constructing the carrier's railroad, it became necessary for it to cross imder the 
Southern Railway at Lexington, and under the Seaboard Air Line Railway at Wades- 
boro, and also to install grade crossings with the Southern Railway at Winston-Salem 
and at Albemarle. As the Southbound Company was the junior carrier, the expense of 
these crossings was wholly borne by it. In the tentative valuation all costs borne by the 
Southboimd Company have been included in the statement of original cost to date. . . . 

" The carrier contends that if it be assumed for purposes of deter m ining the cost of 
reproduction that other railroads exist as of valuation date, then as a matter of theory 
it must be assumed that the identical structm-es which the Southboimd Company as the 
junior carrier was obliged to construct would likewise have to be constructed in re- 
production. 

" The method followed in the tentative valuation does in fact contemplate the as- 
sumed existence of the railroads as crossed, and gives full credit in the cost of repro- 



19 

Point is supposed to have built a bridge where sixty- 
years later a line from Brunswick to then undeveloped 
coal and ore lands will cross! Small wonder that the 
necessity for preliminary surveys is eliminated. And 
yet this device commended itself to the Commission as 
" involving the minimum of conjecture, and as the only 
plan which in all its aspects is feasible and certain in 
practical appHcation/^ ^ 

Hypothesis has also eliminated the contingencies 
allowance, as such, in the cost of reproduction. The 
claim for a contingencies allowance, in terms of a per- 
centage of the cost of reproduction, 2 is based largely 
upon the analogy between the task of estimating cost 
before construction and that of estimating cost of 
" theoretical '' reproduction: 

When the construction of a railroad is under consideration it is 
customary for an engineer to estimate the amount of money it will 
be necessary to expend in building the property. Experience has 
shown that it is practically impossible, no matter how carefully such 
an estimate may have been made, to include all the items of expense 
which will be incurred in the work of construction. Additional ex- 
pense is caused by omissions and unforeseen difficulties in the work 
of construction. Necessary materials are sometimes omitted. From 
soundings a cut may appear to be made up entirely of earth and the 

duction estimates for whatever is shown to be owned by a carrier, or occupied and used 
by it, while showing, as a historical fact for whatever it may be worth, the expenditures 
in fact made by the carrier in original construction. The method commends itself as 
involving the minimum of conjecture, and as the only plan which in all its aspects is 
feasible and certain in practical application." 

1 Winston-Salem Southbound, 1 Val. Rep. 187, 194. But a telegraph line, built by 
the Texas Midland, and owned by the Western Union Telegraph Company, was in- 
cluded in the cost of reproduction of the Texas Midland. 1 Val. Rep. 1, 45. See Protest, 
A., B. & A., p. 13; Winston-Salem Southboiind, p. 12, and Hearings, January, 1917, 
p. 136 and following. Mr. FarreU there (p. 144) concluded: " Any change from the 
present program might render it impossible for the engineers of the Commission to do 
with the degree of accuracy which the Supreme Court has said it is necessary for us to do 
our work, the thing under a different plan they would be required to do. Under the present 
plan they can give us all the facts, an estimate with some degree of accuracy, of what it 
would cost to reproduce the thing that is there today. But if you change the plan I am 
fearful that the result will be that they will not be able to give us information which will 
be at all reliable." 

2 See Railroad Valuation, pp. 47-50, and briefs and cases there cited ; also Hearings, 
May, 1915, where Mr. Holbrook, of the Southern Pacific defined contingencies as " un- 
foreseen, uninvestigated or indeterminate items of construction expense." P. 45. 



20 

estimate for excavating and digging is based upon this expectation. 
However, when the work is performed it is found that it contains 
a large boulder which it is necessary to cut through or entirely re- 
move. This unforeseen condition lengthens the time allowed for 
construction and correspondingly increases the expense. Frequently 
quicksand is found where solid earth was expected. Numerous 
other instances of unforeseen difficulties could be cited which occur 
and which add to the total cost of the work. In order to provide for 
expenses of this kind the practice of including a certain sum for con- 
tingencies in estimates of the prospective cost of construction has 
been quite generally adopted.^ 

The railroads have contended that, in reproduction, 
omissions would develop in the inventory, and further 
that unforeseen difficulties, such as occurred in con- 
struction, should be hypothetically anticipated, and 
that, therefore, to secure a figure fairly representative of 
reproduction cost, an estimate to take account of con- 
tingencies should be made.^ The possibiUties of " hid- 
den quantities, '^ and the nature of the " unforeseen 
difficulties '' were explained at length.^ Even Director 
Prouty, who has developed a much more critical atti- 
tude toward carrier reproduction estimates than that 
shown in his handhng of the Spokane case,* acknowl- 
edged that in measuring quantities, " there are many 
cases where they must be guessed at/' ^ And in esti- 

1 Texas Midland, 1 Val. Rep. 1, 25. 

The claim of the carrier that the inclusion of the " contingencies " allowance was 
"the settled practice" (Texas Midland Reply Brief, p. 166) was disposed of by the 
Commission in the following words: 

" The chief insistence of the carriers in favor of this inclusion is that inasmuch as it 
has been commonly allowed in the past it should be made here. But this would by no 
means follow. Such an addition might perhaps be made in case of a superficial inventory, 
where omissions and oversights would be expected, but not in one made with greater 
care. Much would depend upon the method by which prices were determined. Nor 
can it be said that the methods and practices involved in the valuation of railroad prop- 
erties in the past have yet reached that state of permanence which entitles them to the 
rank of authority." Texas Midland, 1 Val. Rep. 1, 146. 

2 Texas Midland Brief, pp. 693-699. 

3 Hearings, March, 1917, pp. 168-289, the testimony of the carrier experts. 

* See for example his discussion. Hearings, March, 1917, pp. 282, 283 and compare 
the facts in the Spokane case, as developed in Railroad Valuation, p. 54. Railroad 
witnesses in the 1917 Hearing had cited an instance of a "peripatetic orchard" and of a 
moimtain which " got up and advanced down into the cut." 

6 Ibid., p. 281. Compare Texas Midland, 1 Val. Rep. 1, 144. 



21 

mating quantities the representatives of the Commission 
have been instructed to rely largely upon the carriers 
statements, supplemented by records, and tested by 
observation. The statements and records are accepted 
unless they appear " erroneous on their face." ^ But 
the Commission did not .agree that any formal allow- 
ance should be made: 

The road has been constructed. Every item which enters into the 
property is present and can be inventoried. Those things which are 
omitted in the estimate of original construction are all here in case of 
the completed property .^ 

The Commission continued: 

What is true of omissions in the estimate of original cost is equally 
true of those unforeseen happenings and conditions which in pre- 
liminary estimates must be taken care of by an allowance for con- 
tingencies. The engineer in the making of his original estimate may 
overlook many of the difficulties to be encountered; the engineer in 
estimating cost of reproduction has before him every one of those 
difficulties. If the sounding rod struck what appeared to be soUd 
rock but was in fact a boulder, and if for that reason the pier must be 
sunk twenty feet deeper, this is known to-day.^ 

1 Texas Midland, 1 Val. Rep. 1, 26. The attorneys for the carrier declared that Mr. 
Prouty was inconsistent: " He refuses to take clearing and grubbing from existing 
records, and on the other hand, excludes contingencies unless . . . derived from rec- 
ords. . . ." Notes and Comments, p. 127. 

2 Texas Midland, 1 Val. Rep. 1, 143. It would not seem, however, that the example 
of the equipment (composed of large single units) is a fair one by which to establish the 
completeness of the entire inventory: 

*' It may be said, altho that claim has not been very clearly urged by the carriers, 
that it is impossible to enumerate all the items of property which enter into the construc- 
tion of a railroad, and that some sum must be included to take care of inevitable omis- 
sions. While this might be so in case of an inventory hastily taken, it is not true of the 
inventories made by the Commission pursuant to the valuation act. To an extent the 
Commission's inventory is made in the first instance by the carrier and checked by the 
Commission. This is true of equipment. The carrier furnishes a list of its rolling stock 
of all kinds, and that list is verified by the representatives of the Commission. It is 
significant as bearing upon the accuracy of the work that up to the present time in no 
case has there been any dispute between the carriers and the Commission as to the units 
of equipment which the carrier owns. Further investigation by the Commission's 
engineers has shown that many such units which appeared upon the records of the car- 
rier as in existence were no longer in service, and in some instances equipment has been 
identified which did not appear upon the records of the carrier; but in the end there has 
been a complete agreement between the carrier, the engineer, and the accountant, all 
approaching this subject from different points of view." Ibid. 

For the carrier's stand, see Notes and Comments, pp. 127-129; and Carrier Valua- 
tion Brief of 1915, p. 105 and following. 

Ibid., p. 144. The discussion is continued: 



22 

The " weather " contingency, the reahty of which was 
recognized by Mr. Prouty who cited the repeated wash- 
outs of a portion of the Salt Lake route ^ has been con- 
pensated for by allowance in the unit prices estabhshed.^ 
" No contractor would name a price which did not in- 
clude all the elements of chance named above '' — acci- 
dents, floods, washouts, strikes. " There would be no 
propriety in allowing a second time for contingencies of 
that class which have been once compensated for in the 
price apphed." ^ The question, says the Commission, 
is not what has been done in the past, but rather what 
ought to be done now. Preferring to give weight to the 
element of doubt at the specific point where doubt 
occurs, no allowance, as such, is made for contingencies.* 

II. Cost of Reproduction 

The methods used to secure the figures presented in 
accordance mth the foregoing hypothesis are described 

" An instance was brought to attention where in the addition of a second track 
quicksand developed which required a large amount of expensive excavation, the replac- 
ing of solid earth where the quicksand had been, and the construction of an expensive 
mattress to be used in that connection. It was said that this was a contingency. So it 
was in the original construction of the property; but to-day the thing done is there and 
the cost of doing it will all be estimated in reproduction. No second allowance should 
be made by way of contingencies." P. 145. 

1 Hearings, December, 1917, pp. 146, 147. See Hearings, March, 1917, p. 184 for the 
oozing of mud into a timnel, " doubling cost," the result of a storm; and p. 259, for a 
moimtain slide. 

2 Texas Midland, 1 Val. Rep. 1, 145-147. 

3 Ibid., p. 147. 

4 Texas [Midland, 1 Val. Rep. 1, 147. At p. 26 it is said: 

" The statement that no provision for contingencies has been made by us in this 
proceeding is therefore incorrect. The figure reported as cost of reproduction new is an 
estimate of the amount of money necessary to reproduce the identical property imder 
valuation. The inventory is made with great care and the prices applied are arrived at 
after exhaustive study. Every necessary expense is taken into consideration. 

" Since reproduction new is at best an estimate, it is apparent that an estimate 
arrived at upon a basis as outlined above is as liable to be too high as too low and that 
therefore there is no warrant for the addition of a definite amount to cover contin- 
gencies, but that any allowance of that kind which ought to be made shoiUd be and 
is taken care of in connection with partictdar items of property." 

See also testimony of Mr. Worley, Hearings, March, 1917, p. 916. 



23 

at length in the Texas Midland case.^ The aim has been 
to do a " common sense job/' and everything asked of 
the carriers has been asked " for the purpose of getting 
a ninety-nine per cent inventory, rather than ^n eighty 
per cent inventory." ^ The Commission has sought to 
command the confidence of all parties. It has therefore 
rejected the original proposal that carrier schedules be 
checked by the Commission's engineers,^ tho this had 
been the typical procedure in the so-called state valua- 
tions. ^ Instead the Commission has made the inven- 
tory, calling upon the carriers for needed information 
and assistance, and requesting the active participation 
of carrier employees, this decision being justified on the 
basis of authority and of economy.^ But the result has 
none the less been to pile estimate on average. 

* 1 Val. Rep. 1, 7, 108-182 (Appendix 3), By reference, Appendix 3 may be made a 
part of subsequent tentative valuations (p. 7). The appendix is obviously based on 
Prouty, Memorandum. 

The following is a brief, but adequate, description of the organization of the Valua- 
tion Work. Under Mr. Charies Prouty, formeriy a member of the Commission and now 
Director of the Bureau (formeriy the Division) of Valuation, the country is divided into 
five districts, each containing approximately 50,000 miles of line. At the headquarters 
of each district is a member of the Commission's Engineering Board, with a District 
Engineer, a District Accountant, and a Valuation Attorney who acts as supervisor of 
the land appraisals, and as legal adviser for the district. Each of these section heads 
works independently of the others; he is responsible only to Washington. When his 
work on a carrier is completed, the result is forwarded to the Valuation Bureau Head- 
quarters, where the Valuation Analysts and assistants, bring the reports of the three 
sections into the form of the tentative valuations served on the carriers. The Director 
has also, as principal assistants, a Supervisor of Accounts, and a Solicitor. The five 
members of the Engineering Board constitute the intimate body of technical advisors. 
Obviously the decentralized organization is only possible because of the distinct cleavage 
of function. See Texas Midland, 1 Val. Rep. 1, 109, 160, 176. 

2 Quoted from remarks of Mr. Worley, of the Engineering Board, Hearings, October, 
1913, pp. 10, 35. 

» Hearings, September, 1913, pp. 32, 33. 
* Railroad Valuation, pp. 50-53. 

' " An inventory of this character can only be prepared after an inspection of the 
property. Some representative of the Commission must either see the property which 
is included or must ascertain such facts as demonstrate the existence of that property to 
a reasonable certainty. If an inventory is filed by the carrier, it must be checked by the 
Commission to this degree of certainty, and this would mean that the work of filing the 
inventory would be dupUcated by the work of subsequently checking the same inven- 
tory. It was felt that the total expense of preparing the inventory would be less if made 
by the Commission in the first instance with such assistance from the carrier as could 



24 

The engineering field work lias been divided between 
different branches, the basis of division being the 
speciaHzed skill required for the work of inventory. The 
road and track party, to which is attached a represen- 
tative of the carrier as " pilot," ^ measures and inven- 
tories the roadway and all structures except bridges 
over 12 feet long, and buildings. The bridge party, 
consisting of two engineers (and such additional men 
as may occasionally be needed), one the Commission's 
engineer, the other, the carrier's representative, meas- 
ures bridges with over a 12-foot span. The mechanical 
and the building party are of similar composition: the 
one to deal with equipment, shop tools, machinery, and 
simple electrical installations; the other with buildings, 
including full and water stations. The inventory of 
compHcated electrical plant is done by the electrical 
branch, and of signal apparatus, interlocking plants, 
etc., by the signal branch.^ In the case of a very sim- 
ple property the road and track party may inventory 
bridges and buildings, but in general the Commission 
has found that '^ where properties are at all compH- 
cated, the work can be more expeditiously, more satis- 

properly be called for and granted. This method avoids the duplication of effort and 
secures an inventory which can be vouched for by the Commission and which also re- 
flects the claims of the carrier itself, at the least total outlay by which a result of that 
character could be obtained." Tejcas Midland, 1 Val. Rep. 1, 110. 

^ His fxmction is described: 

" A representative of the carrier, ordinarily known as a pilot, accompanies each road- 
and-track party. This person is an engineer of experience and ability whose duty it is to 
point out the property to be inventoried and to see that it is properly measured, inven- 
toried, and classified. Before beginning work he prepares himself by a careful examina- 
tion of the records of the carrier, by going over the property in advance, and by 
conferring with others." Texas Midland, 1 Val. Rep. 1, 112. See also Hearings, Janu- 
ary, 1917, pp. 35, 36. 

' Manuals governing the field work of each branch are published in pamphlet form 
by the Commission: Instructions for the Field Work of the Roadway (Bridge, Build- 
ing, Signal, Mechanical, Electrical) Branch of the Engineering Section, etc. See also 
Texas Midland, 1 Val. Rep. 1, 110-112. 

The Railway Age (Railway Age Gazette) has from time to time published descrip- 
tions of the operations and organization in the field. Vol. 55, p. 715; vol. 56, pp. Ill, 
320, 1531; vol. 57, p. 195; vol. 58, p. 1107; vol. 59, pp. 560, 569. 



25 

factorily, and more cheaply done by the several branches 
acting mdependently." ^ 

The basis of the inventory is provided in the law: the 
classification of expenditiu-es for road and equipment 
prescribed in the Commission's accounting regulations. 
Such items of expenditure as would not be charged to 
grading, clearing, and grubbing for example, are grouped 
under Grading, etc.^ The units of inventory are those 
" current in the purchase and sale of the property ... 
or commonly used in construction contracts and settle- 
ments; " the individual tie; the gross ton of rails; the 
net ton of fastenings; the single car.^ But units of 
equipment of the same series are bulked in groups, as 
are standardized culverts, short trestles, and small 
structures generally. The ideal sought is detail ^' suffi- 
cient to enable the one who examines the report to form 
a fairly accurate judgment of the character and condi- 
tion of the property." ^ 

That an inventory might be secured which permitted 
of such a '^ fairly accurate " judgment without at all 
constituting a ^^ ninety-nine per cent inventory," or 
even an '^ eighty per cent inventory " seems obvious. 
It is not the whole story to state that there has been 
" almost no complaint of omission . . . and compara- 
tively little dispute as to quantities." ^ The procedure, 
both in the field and in the hearings, is such as to place 
the carriers at a strategic disadvantage. The govern- 
ment engineer is always in* charge, and the burden of 
dissenting is placed upon the carrier.^ And in the hear- 

1 Texas Midland, 1 Val. Rep. 1, 110. 
« Ibid., p. 114. 
» Ibid., p. 113. 

* Ibid., p. 113. 

6 Ibid., p. 112. The railroads have all asked for the general "Contingencies Allow- 
ance." 

* " Carbon copies of all field notes are furnished to the representative of the carrier, 
who signs the same as evidence that they have been correctly taken, so far as his obser- 



26 

ings, even tho the strict rules of evidence may not be 
applicable, and '^ no burden of proof is placed upon the 
carriers/' ^ as a practical matter the burden of proof does 
rest upon them.^ They must attack data presented 
in mechanically correct tabulations by a subordinate 
agency of the body which is to make the final judgment. 
K they have argued in general terms it is because from a 
strategic point of ^dew they can do httle else.^ 

But the quantity reported by the Commission for each 
inventory unit is at best only an estimate, a more ac- 
curate estimate than those upon which the state ap- 
praisals have been predicated, perhaps, but none the 
less an estimate.^ The degree of error necessarily 
differs with the unit of plant measured or counted, de- 
pending upon the extent to which human judgment and 
not mechanical counting is significant.^ How great this 
error may be can only be determined by a qualified 

vation goes. If the representative of the carrier dissents upon any point, such d is sent is 
minuted upon the notes themselves at the time. 

It is generally agreed between the bureau and the carrier that such notes shall be 
taken as correct, unless altered by the Commission upon notice to the carrier or tinlesa 
objection is filed by the carrier within a limited time. 

It will be seen, therefore, that this inventory is really the joint product of the carrier 
and the bureau, or at all events, that the Commission's valuation forces have fully con- 
sidered everything which the carrier desires to point out or to say in the completion of 
the inventory." Texas ^-lidland, 1 Val. Rep. 1, 112. 

1 Texas Midland Brief, p. 234. 

* Prouty, Memorandum, p. 73. " The presumption should be that the work is right, 
and it should be incumbent upon the carrier to show error with reasonable certainty," 

' With this attitude, however, the Commission has exhibited little sympathy. Said 
Chairman HaU at the Hearings, March, 1917: 

" Now this is the twelfth day of our hearing in this matter in which the full Com- 
mission has been sitting. The tentative reports at least have the merit of containing 
definite figures. The final report, the final Valuation, must contain definite figures. 
You say that the figures in the tentative report are wrong. We want to know the figiires 
that are right, and thus far up to day, the 12th day of the hearing, we have not been 
furnished with those figures. What the Commission desire is something concrete. ..." 
P. 342. 

Compare Commissioner McChord: 

*' We have been delayed here with speeches and agreements and theories ... let us 
have something practical." P. 61. 

* Raibroad Valuation, pp. 94r-96. See also Winston-Salem Southbound, 1 Val. Rep 
187, 192. 

« Texas Midland, 1 Val. Rep. 1, 144. 



27 

engineer. To point out the existence of the source of 
error is sufficient for the economist. The conspicuous 
case is, of course, the definition of standards and the 
classification of materials, doubly important, too, be- 
cause of the necessary correlation with unit prices.^ But 
the problem of estimating is by no means limited to 
grading.2 The Commission's engineers have inventoried 
the ties (by classes) by counting the ties in two 600-foot 
sections in each mile; ^ the weight, kind of material, 
brand and standard length of rail, whether new or relay, 
have been noted at least once in each mile; ^ the " prob- 
able dimensions " of the accessible portions of bridges 
and the " probable penetration '^ of piles have been 
reported.^ Buildings have been inventoried on the 
basis of cubic contents, or the square feet in side wall or 
floor. ^ And locomotives have been inventoried by the 
pound as in the Minnesota Rate cases. ^ 

1 Mr. Hunter McDonald, Chief Engineer of the N., C. & St. L. Ry. testified at the 
March, 1917, Hearings: 

" Classification of material on any raUroad is largely a matter of judgment on the 
part of the engineer. In some instances the actual quantities can be measiu-ed, where 
the stratification is absolute and well defined, but it is rarely the case that it can be meas- 
ured by actual cross section, and arriving at a percentage is the only practical way to 
do it, and that is a question of judgment on the part of the engineer." P. 245. 

See also Hearings, September, 1915, pp. 15-17; A., B. & A. Brief, pp. 147, 148; 
Notes and Comments, p. 264, and Texas Midland, 1 Val. Rep. 1, 39. 

2 See Railroad Valuation, pp. 57, 95, 139. Specifications for grading quantities are 
contained in Instructions, Roadway Branch, p. 10. 

3 Ibid., p. 11. 
* Ibid. 

5 Ibid., Bridge Branch, p. 14. 

6 The following is Mr. Prouty's explanation: 

Director Prouty: " Now I ought to say, for the information of the Commission . . . 
that we computed the value of buildings differently in different districts. Mr. Worley, 
for example, appUes what is called the square foot method. That is to say he will in- 
quire what it costs to produce a waU per square foot. . . . And so he determines the 
square-foot price of the floor and the roof. That is correct, is it not ? " 

Mr, Worley: " That is correct." 

Director Prouty: " In the three eastern districts we apply what is called the cubic- 
foot method. We determine the cost of a building in that way. We determine the 
number of cubic feet in the building, and determine the price per cubic foot, and then in 
valuing buildings of the same type we simply determine the cubic feet in the building, 
and apply to the number of cubic feet, the price per cubic foot." Hearings, March, 1917, 
P- 920. T RaUroad Valuation, p. 72. 



28 

But the inventory is only half the story. Before the 
cost of " theoretical reproduction " can be reported, 
unit prices must be appHed to the quantities found. And 
it need hardly be emphasized at this point that, in the 
fixing of prices, judgment — or call it, expert opinion — 
is the ultimate determinant. This is inevitable from the 
nature of the case, since there must be a correlation of the 
specifications and the figiu-es of cost.^ And more than 
this, too, since the Commission's unit prices are for 
units in place, and cost of transportation, handhng, 
storage, installation, and contingencies must be taken 
into account.2 

The program of the Bureau of Valuation has already 
been stated: an attempt " to report . . . the cost of 
reproducing the property actually in existence under 
present conditions by present methods and at present 
prices.^' ^ But altho the unit prices are reported as of 
June 30, 1914, the valuation date, they are not the exact 
prices at which the units were bought and sold, or at 
which contracts were signed, on that date. Such a fig- 
ure might be so abnormally low, or so abnormally high, 
as not " in any sense ... to represent normal or fair 
values. '^ Instead the expressed purpose is to ascertain 
" normal prices." ^ Is not the best measure of the cost 
of doing a piece of work on June 30, 1914, what that 
work did in fact cost during the years immediately pre- 
ceding that date ? ^ Upon the assumption of an afifirma- 

1 See Eailroad Valuation, pp. 94, 95; Hearings, September, 1913, p. 30; and May, 
1915, p. 96 and following. 

But there has been no attempt to correlate the construction period and unit prices. 
See Texas Midland Brief, pp. 646, 647; Reply Brief, p. 66; and Durham, Comments 
... A., B. & A., p. 22. 

* Texas Midland, 1 Val. Rep. 1, 81, 83, 136, 139; also Texas Midland Brief, pp. 648, 
699. 

» Prouty, Memorandum, p. 6; italics, the writer's. 

< Winston-Salem Southbound, 1 Val. Rep. 187, 192, 193. Compare Texas Midland, 
ibid., pp. 135-140. This is a substantial acceptance of the basis proposed by Mr. Malt- 
bie, speaking for the Nat'l Ass'n Ry. Com'rs, Hearings, May, 1915, p. 99. 

» Texas Midland, 1 Val. Rep. 1, 137. 



tive answer to this question (which may or may not be 
the correct answer — who can say ?) figures have been 
compiled which purport, on their face, to be correct to 
the final dollar. 

A wide variety of supporting data has been sought by 
the Commission. The carriers have reported the actual 
prices paid for labor, and for materials and suppUes, for 
five years (and in some instances, ten years) prior to the 
valuation date. These have sometimes been verified by 
the Conamission's accountants, and sometimes manu- 
facturers have been consulted to determine the prices at 
which standard materials have been furnished.^ An 
average figure has then been calculated to furnish " the 
basis of the price apphed by the Commission. '' 2 

All the information is reviewed by the engineers who 
finally fix the prices to be apphed to the inventory quan- 
tities. These engineers are '' men of experience and of 
judgment who have built, bought, and installed the kind 
of material or apparatus under consideration . . . prac- 
tical men who bring to the question before them judg- 
ment ripened by experience . . . actuated by the sole 
desire of applying a proper price. ^' ^ Accordingly the 

1 Texas Midland, 1 Val. Rep. 1, 136. 

The carriers have furnished the data in compliance with Valuation Order No. 14, of 
February 9, 1915: " Order, instructions, and forms pertaining to purchases of materials, 
prices paid, and rates of compensation paid for labor." 

This order required every carrier to file a statement of the two largest purchases of 
each class of material for each calendar year from 1910 to 1914, inclusive, together with 
net prices paid. In the event two purchases per year had not been made, a statement of 
such purchases as might have been made was required. Information with respect to the 
period from 1905 to 1914, inclusive, and as many as four purchases per year were in some 
instances required. The statement required, among other things, information as to the 
purpose for which the material was used, the maker, his catalogue number or reference, 
name of the seller, and the freight charges actually paid. The carrier was also required 
to report the rates of compensation paid on each separate division for each calendar 
year, 1910-14, to all classes of employees. This rate of compensation was defimed to 
be the usual and ordinary rate paid for the particular occupation, and required an aver- 
age for each year obtained by taking the governing rate on the first day of January, 
April, July, and October in each year ajid dividing by four. Ibid., pp. 35, 36; 136-139. 

« Ibid., p. 137. » Ibid., p. 138. 



30 

cost data so laboriously gathered are not controlling, 
but their use depends upon observation and compari- 
son; ultimately upon that expert judgment of which 
the Commission expressed so poor an opinion.^ But it 
is the expert opinion of the Commission's employees. 
Said Mr. Prouty: 

. . . We have declined to cooperate. When an inventory has 
been made up, which Hsts the property of the carrier by our engineers, 
I have insisted and I understand that my associates upon the division 
of valuation agree with me, that our engineer shaU attach to the in- 
ventory his figures, and that he shall arrive at those prices by some 
independent process, and when his price has been once determined he 
should attach it to the inventory. Then we are glad to have him 
discuss prices with the engineer of the carrier, and we are glad to 
have him change his prices if he sees fit to do so in consequence of the 
discussion.2 

Since the semi-cooperative method of making the 
inventory has substantially estopped challenge of quan- 
tities, the burden of the carrier attack on the figures 
reported has been against the prices. The Texas Mid- 
land attorneys developed the fact that Mr. Worley did 

1 Texas Midland, 1 Val. Rep. 1, 136. A very vague explanation of the method of 
fixing upon unit prices, as given by Mr. Worley, is quoted in Benton and Farrell, Reply 
Brief, Kansas City Southern case, pp. 4-8. Mr. Worley declared that unit prices had 
been " matters of discussion " since the day the work started: 

" They have been matters of discussion and conference between the members of the 
engineering board in session in Washington and other places, they have been matters of 
conference between the engineering board and director, between the engineering board, 
the director, and the accountants, between the engineering board and the central cost 
bureau; they have been matters of discussion between the individual members of the 
engineering board and the carriers in his particular districts. They are a matter of con- 
ference when it comes to fixing the unit prices between the member of the engineering 
board, the district accoimtant, sometimes the valuation attorney, and always the dis- 
trict engineer and the assistant district engineer, with the employee at the head of the 
section." P. 7. 

2 Hearings, January, 1917, p. 35. 

Mr. Butler complained at the March, 1917, Hearings: 

" We have never known, we do not know now, how the unit prices applied to our 
property were determined. We simply get a tentative valuation with certain unit 
prices." P. 211. 

Mr. Brantley (Hearings, January, 1917, p. 26) expressed his dissatisfaction over the 
lack of cooperation in fixing unit prices. The joint determination of such prices had 
been proposed in Carrier Valuation Brief of 1915, p. 112; and the attorneys for the 
Texas Midland stated their feeling that a " painstaking and frank conference . . . 
would result in good." Notes and Comments, p. 247. 



31 



not know many of the conditions governing the con- 
struction projects from which he had secured his sup- 
porting data and which would account for the wide 
variations.^ Presumably the figures offered a guide for 
future " reproduction ^' only when conditions were 
comparable, or when the pecuhar conditions were taken 
into account in fixing upon imit prices.^ 

Experts were also introduced by the railroads, who 
fixed upon higher unit prices. In answer to these claims, 

1 These are discussed in detail, Texas Midland Brief, pp. 552-649. 

The following statement pm-ports to be briefly descriptive of the facts Mr. Worley 
read into the record. The attorneys for the Texas Midland stated that " the difficulty 
is in finding out what the facts say." 





Range of prices 


Dates 


Unit Price 


Accoimt 


I. C. C. 


T.M. 


Clearing . . 


$22.40-$54.45 per acre 
22.50- 80.00 per acre 
15.00- 50.00 per acre 
.11- .18 per cu. yd. 
.25- .37 per cu. yd. 
.55- .90 per cu. yd. 
.15- .37 per hn. ft. 
.25- .35 per lin. ft. 
.01- .40 per Un. mile 
9.00- 25.25 per M. B. M. 
5.20- 18.15 per cu. yd. 
.35- .66 each 
17.00- 26.00 per gr. ton 
.02- .1085 per cu. yd. 
.55- .80 per cu. yd. 
125.00-650.00 per mile 
115.00-377.00 per mile 
190.00-482.00 per mile 
15.00- 50.00 each 


1901-12 
1902-12 
1894-12 
1901-12 
1901-12 
1901-12 
1898-12 
1901-14 
1900-12 
1894-12 
1905-12 
1901-14 
1909-13 
1906-14 
1910-14 
1901-15 
1906-13 
1903-12 
1901-12 


25.00 
40.00 

15 
35 
65 
40 
35 

0-11.30 
.56 
24.00 
.15§ 
.66^ 
25000 
225.00 
220.00 
20.00 


$35 00 


Grubbing . ... 


52 00 


Clearing and Grubbing 

Earth (2 way) 


18 


Loose rock (2 way) 

SoKd rock (2 way) 

Bois d'arc piling 


43 
97 


Treated pine piling 


.... 


Framing br. timber 

Concrete 


15 00 


Burnettiiied ties 


69 


Relay railes 


29 50 


Sand ballast 


36 


Crushed rock 


80 


Laying track 




Train and Engine service . . 

Full earth surfacing 

Installiog turnouts 


50.00 



The unit prices shown in the last two colimins are an addition to the table shown on 
p. 243 of Notes and Comments. They are taken from the Texas Midland Brief at the 
pages indicated in the original table. 

2 Thus, tho he claimed to base his price of $250 per mile upon supporting data for 
track laying, the figures ranging from $125 to $650 per mile for work done between 1901 
and 1915 over much of the country west of the Mississippi, " he could not state the 
weight or amount of rail laid, the number of switches per mile, number of bridges which 
might delay track laying nor conditions under which the work was done." Altho " all 
of the information was considered in determining his price," that price did not contem- 
plate any " particular method " of track laying, being, as he thought, sufficient for hand 
or machine work. Texas Midland Brief, pp. 634, 635. These statements have been 
verified in the typewritten record. 



32 

Mr. Prouty insisted: " The presumption should be that 
the work is right, and it should be incumbent upon the 
carrier to show error with reasonable certainty." ^ The 
theory would seem to be that the testimony of even the 
most eminent expert witness hardly makes that show of 
scientific procedure which is created by arrays of cost 
figures, however incomparable and however irrelevant.^ 
Nor does the respectabihty attach to opinions of rail- 
road employees ^ that attaches to the '^ judgment " of 

1 Prouty, Memorandum, p. 73. At pp. 65-70, Mr. Prouty indicates the basis of the 
attitude of the Bureau of Valuation, which " in the light of what it could see and forecast 
believed that it would be unwise to enter into any contest with the carrier in the produc- 
tion of opinion testimony." He continued (p. 67): " It seemed to us that the best evi- 
dence was found in the experience of the past. The fact speaks without prejudice. It 
cannot be varied to suit the inclination of the parties." 

In Notes and Comments, pp. 239-241, it is shown that the carriers did not (as Mr. 
Prouty alleged) " contend that the only proper evidence of these prices is the opinion 
of an expert." 

2 The data depended upon by Mr. Woriey were called " a promiscuous unassimilated 
mass of figtures gathered from everywhere" (Texas Midland Reply Brief, p. 333), and 
" a heterogeneous mass of inconsistent data " (p. 347). The imit prices are discussed 
in detail, Texas Midland Brief, pp. 556-643; A., B. & A. Brief, pp. 159, 702. The Texas 
Midland summarizes its attack upon Mr. Worley's unit prices for grading in the follow- 
ing language: 

" Much of the work he had never seen. He did not know the geographic or climatic 
conditions (Record, p. 805), he did not know the nature of the soU, he did not know 
whether or not the contractor made or lost money, he knew of no method of conversion 
by which the figures quoted for contracts on a two-way basis could be converted to the 
correlative figure on a one-way basis (Record, p. 807). . . . He made no investigation 
of the peculiarities of the grading work on the Texas Midland," etc. P. 333. 

See Texas Midland, 1 Val. Rep. 1, 39, for discussion in detail of one and two-way 
work. See also Texas Midland Brief, pp. 576-643, for criticism of other unit prices, and 
the Protests, Texas Midland, pp. 17, 18; A., B. & A., p. 21; Kansas City Southern, pp. 
20-30; N. O., T. & M., pp. 24-28. 

» Prouty, Memorandum, pp. 71, 77, where the Director points out that the en- 
gineers of the Santa Fe and St. Louis Southwestern were not disinterested witnesses. 

" The prices established and approved in case of the Texas Midland must have a 
most important bearing upon the prices which are applied to these properties." P. 71. 

See also the opinion of the Commission: 

" The \inreliabihty of mere opinion evidence is well understood by all those who have 
ever had experience with it. An opinion is personal to the man who gives it. It depends 
upon his education, his mental habit, his present mental state. It is influenced by his 
environment and often controlled by the objective point which he desires to reach. The 
same man may hold different opinions upon the same subject at different times. 

Perhaps the most serious infirmity of opinion evidence is that the witness may be 
selected at the wiU of the one producing him. A fact must be established by those who 
have knowledge of it, who were present and saw it, for example, but an expert can be 
brought from the ends of the earth, and a dozen may be rejected imtil the right one is 
found. Given time and the money, almost any opinion can be had within certain 
limits." These paragraphs are taken from Prouty, Memorandum, p. 65. 



33 

*' practical men/' government employees instructed to 
be fair, who, having considered all the cost data and 
examined the work to be done " theoretically," " finally 
reach a price which in their judgment is right." ^ But 
whether unit prices fixed in one way or fixed in the other 
are more truly a measure of what it would cost to re- 
produce a railroad " theoretically," who can say ? The 
Commission has been content to accept the Bureau's 
figures, the figures of the tentative valuation being made 
final except where the Bureau has later agreed that in- 
creases would be " fair." ^ But from the nature of the 
case the ultimate determinant is judgment, and the 
figures reported are only estimates. Any accuracy 
professed for them is largely specious.^ 

" Overhead charges " have been handled by the 
Bureau on conventional Unes. For '' general expendi- 
tures " and " engineering," resort has been had to the 
bulk percentage expedient of the state appraisals.^ Pre- 
liminary estimates based on a " sjrnthetic " program 
which produced the costs of the essential preliminary 
organization have been abandoned in favor of the short 
cut,^ which, however, has been presented as an attempt 
to appty the test " apphed in the development of prices, 
namely, the actual experience of the past." ® Do the 
facts justify the claim ? 

For general expenses, li per cent of the road accounts 
except land has been fixed upon as ^' about right for the 

1 Prouty, Memorandum, p. 68. See, however. Notes and Comments, pp. 246, 247. 

« Kansas City Southern, 1 Val. Rep. 223, 238, 254. 

' Raih-oad Valuation, p. 96. 

* Ibid., pp. 73, 95. 

6 Texas Midland, 1 Val. Rep. 1, 29, 47. 

6 Ibid., p. 142. 

The Commission's Statistical Study is explained in detail, with illustrative charts, in 
Hearings, March, 1917, pp. 879-903, the testimony of Mr. D. E. Brown, the Supervisor 
of Accounts. 



34 

average case." ^ This figure has been chosen after an 
examination of the costs in constructing four properties 
where the facts are known: the Virginian, a " fairly- 
illustrative " case, 1.593; the Winston-Salem South- 
bound, where '' careful review " by the accountants 
shows 1.271; the Las Vegas and Tonopah, an '^ inde- 
pendent company,'' 1.224; and the Tonopah and Tide- 
water, "of recent construction," 1.775.^ The numerical 
average of these four sets of figures is 1.466, but it is 
impossible to say to what extent the Bureau has been 
guided by this fact.^ These figures are simply support- 
ing data; independent judgment is assumed to fix upon 
the percentage of 1.5.^ It is not at all a question of 
" actual experience." 

The resort to typical roads, rather than to general 
average figures, is due to the unsatisfactory nature of 
the average figures. The study of 121 projects in dif- 
ferent sections of the country, ranging from 2^ to 900 
miles in length (total mileage: 9617), gave the following 
average percentages for the valuation districts : 

Eastern 1.766 

Southern 2.251 

Central 1.362 

Western 838 

Pacific 4.086 

Average 1.930 

The abnormal variations represented by the Western 
and Pacific groups are readily explained: roads in the 

1 Prouty, Memorandum, p. 39. 

General Expenditures include the following accounts of the Commission's classifica- 
tion of investment in road and equipment: Organization expenses; General officers and 
clerks; Law; Stationery and Printing; Taxes, other expenditures — general. For a 
discussion in detail of these and other " overhead charges," see Memorandum on Over- 
head Charges in Valuation, pubhshed by the Presidents' Conference, July 25, 1917. 

2 Prouty, Memorandum, p. 39. 

3 Notes and Comments, p. 156. 

* Texas Midland, 1 Val. Rep. 1, 30, 33; Kansas City Southern, 1 Val. Rep. 223, 257. 



35 

western group were built by parent companies, and 
many general expenses were borne by the latter; while 
the extended construction period of the Western Pacific 
threw the Pacific figures out of Une.^ Because no one 
knew, when the four roads were chosen for study as 
standards, '^ what the figures would show, and no at- 
tempt was made to support any preconceived theory, 
the sole desire being to ascertain the fact,'' the Commis- 
sion beheved the results obtained " fairly representa- 
tive." 2 This was the answer to the carrier claim that, 
taking six other roads, as " typical '' as those selected 
by the Commission, a figure between 4 and 7 could be 
sustained.^ 

The percentage for engineering, fixed upon after a 
study of the same 121 projects,^ is no more significant: 

The amount found charged to engineering varied from 0.837 per 
cent to 9.732 per cent of the total amount shown as investment in 
road excluding land. In six instances the percentage for engineering 
exceeded 6 per cent; in ten instances it was between 5 and 6 per 
cent; in four instances it was below 1 per cent, and in sixteen in- 
stances between 1 and 2 per cent. In the balance of instances, 
eighty-five, it ranged from 2 to 5 per cent. The weighted average 
showed approximately 3.6 per cent. 

Accordingly a maximum of 5 per cent and a minimum 
of 2 per cent have been set, tho it is left to the Com- 

1 Texas Midland, 1 Val. Rep. 1, 30. 

2 Ibid., p. 30. The Commission concluded: 

" From what has been stated we are of the opinion that an estimate of 1 1 per cent on 
all road accounts except land for general expenditures will do justice to the carrier," 
P. 31. 

3 Notes and Comments, pp. 156, 157. The six roads were the Beaumont & G. N., 
49 miles, 5.827 per cent; Crosbyton-Southplains, 40 miles, 4.434 per cent; Rocky 
Mountain & S. F., 107 miles, 5.498 per cent; Santa F4, P. & P., 197 miles, 4.893 per cent; 
C. M. & Gary, 99 miles, 7.094 per cent; Western Pacific, 926 miles, 5.074 per cent. 

* The attorneys for the Texas Midland protested that 75 per cent of these projects 
represented subsidiary lines where it was safe to assume no charge had been made for the 
services of the Chief Engineer and his force, and showed that the Commission's accoun- 
tant had made no inquiry on this score (Hearing, March, 1917, p. 901). Instances were 
cited where no such charges had been made. Notes and Comments, pp. 139-146. The 
figures too were based largely on accounts erected prior to 1907, when the Commission's 
imiform regulations were made effective. Ibid. 



36 

mission's engineer to determine the exact allowance in 
each case. Should he beUeve that there are '' pecuUar 
circumstances " to justify the use of a lower or a higher 
percentage, he is instructed to bring the case to the 
attention of the Bureau.^ 

Here,perhaps, the carriers have again placed too great 
dependence upon the testimony of experts.^ Mr. Charles 
Hansel even testified that the percentage method, which 
other railroad experts had approved,^ was neither proper 
nor accurate. Too many factors varied as between dif- 
ferent properties.^ He proposed, by comparing the 
conditions governing the Virginian, where engineering 
cost was known, with conditions on the road under con- 
sideration, to estimate the reproduction cost of en- 
gineering on the latter. For the A., B. & A. he secured 
a figure of 8.55 per cent, an " unusual and extraordin- 
ary '^ figure for a road which he acknowledged to be 
" ordinary '' and " normal." ^ This result furnished the 
theme for Mr. Prouty's denunciation of expert opinion, 
repeated by the Commission in the Texas Midland 
case. ^ 

The original figures compiled for the Texas Midland 
were built up on the synthetic basis before the decision 

1 Texas Midland, 1 Val. Rep. 1, 28. 

* Figures compiled by the Presidents' Conference Committee, showing an average of 
4.40 per cent were also introduced by the carriers, Prouty, Memorandum, p. 66. Mr. 
Newton of the C, B. & Q. introduced a synthetic estimate for the Texas Midland, Hear- 
ings, March, 1917, p. 290 and following; see Texas Midland Brief, p. 656. 

' See, for example, testimony of Mr. J. E. Willoughby, Chief Engineer of the Atlantic 
Coast Line, Hearings, March, 1917, p. 139. Mr. Willoughby placed the engineering 
figure at 5 per cent, for the Southeast. 

< Hearings, May, 1915, p. 42 and following; March, 1917, p. 816 and following; 
summarized, Notes and Comments, p. 249. See also Texas Midland Brief. At p. 651, 
it is said: 

" A mere list of percentages of engineering cost of total construction cost without 
comparison of conditions in each case with those existing on the road under valuation is 
meaningless." 

s Prouty, Memorandum, p. 66; Notes and Comments, pp. 247-251. 

• Memorandum, p. 66; see comments of Mr. Brantley, A., B. & A. Brief, p. 172. 
Mr. Brantley insisted that the Commission's engineer working imder Washington orders 
was applying a preconceived theory, whereas Mr. Hansel was " searching for the truth 
alone." 



37 

to resort to percentages had been made. But the result, 
translated into terms of percentage, gave 2.15 per cent, 
which Mr. Worley felt was an adequate allowance in 
view of the simple conditions governing the construction 
of the road.i The carrier claimed that a percentage of 
5 or 6 would be more nearly adequate; while the Com- 
mission upon further consideration (the details of which 
are not made apparent) increased the percentage to 
2i per cent. Taken in connection with certain changes 
in the base figures, this gave a net increase in the '^ val- 
uation '^ figures, from $54,926, the tentative allowance, 
to $58,773.2 For the Winston-Salem Southbound, the 
allowance of 5.4 per cent was not protested,^ for the 
Kansas City Southern, 4 per cent was allowed over the 
carrier's protest.* 

" Interest during construction " (a function of two 
variables: the theoretical rate of interest and the the- 
oretical construction period) adds more hypothesis and 
estimate.^ When the Bureau found that an attempt 
to appraise the credit standing of each carrier led to a 
most delicate analysis, it resorted to hypothesis. Let 
the '' reconstruction be done by a company possessing 
good credit and able to buy supplies at advantageous 
prices." Then ^' since a railroad with good credit has 
no difficulty during normal times in borrowing money 
at 4J per cent . . . the rate of 6 per cent would be 

1 The carriers insisted, however, that with relatively inexpensive roadway construc- 
tion costs, such as appeared in the Texas Midland reproduction, the greater was the per- 
centage of engineering, due to the presence of overhead costs which did not vary. Said 
Mr. McDonald of the N., C. & St. L. : " As a general rule the greater the cost, the smaller 
the per cent where there are no other compUcated conditions of construction." Hear- 
ings, March, 1917, p. 738. See also Hearings, May, 1915, p. 43 (Mr. Hansel); and A., 
B., & A. Brief, p. 170. 

2 Texas Midland, 1 Val. Rep. 1, 45. 

« Winston-Salem Southbound, 1 Val. Rep. 187, 209; see, however, Protests, A., B. 
4c A., p. 27; Kansas City Southern, pp. 18, 19; and E,, J. & E., pp. 25, 26. 
* Kansas City Southern, 1 Val. Rep. 223, 253. 
s Railroad Valuation, pp. 76-78. 



38 

ample to cover all incidental items of expense." ^ And 
so 6 per cent has been chosen to be apphed to all car- 
riers, with the added result that upon this basis the 
cost of reproducing different properties is "fairly com- 
parable." 2 

Six per cent has been chosen after an examination of 
the sale of bonds of various kinds for the five years pre- 
ceding June 30, 1914 had " led to the behef that this 
rate would be ample to cover not only the interest on the 
money but any brokerage which would usually be 
charged for the obtaining of the money." Furthermore, 
" six per cent is the legal rate in a large section of this 
country where no other rate is specified." ^ At the pre- 
liminary conference of May, 1915, Mr. W. B. Bailey, the 
General Auditor of the Santa Fe had asked for 7 per cent 
as a minimum.^ Eight per cent was asked by the at- 
torneys for the Texas Midland,^ but the rate of 6 per 
cent was used by the Kansas City Southern.^ 

The tentative valuation of the Texas Midland utihzed 
the formula developed in previous appraisals for cal- 
culating the amount of interest: allowance was made 
for one haK the construction period upon the total ex- 
penditures, exclusive of land and interest.^ Carrier 

1 Texas Midland, 1 Val. Rep. 1, 154. 

2 Ibid., p. 31; Kansas City Southern, 1 Val. Rep. 223, 257. 
» Texas Midland, 1 Val. Rep. 1, 154. 

In their Kansas City Southern Brief, Messrs. Benton and Farrell cite the fact that 6 
per cent is the legal rate of interest in Missouri. P. 9. 

* Hearings, May, 1915. Mr. Bailey said: 

" Measured by principles recognized in court decisions, after giving due weight to all 
the conditions surrounding railway operations, and the well recognized fact that interest 
rates on aU classes of railway securities have shown an upward tendency for some years 
past, 7 per cent is the minimum rate that should be xised in determining interest during 
construction." P. 51. See also Carrier Valuation Brief of 1915, p. 111. 

6 Brief, p. 693. It was insisted that the Texas Midland, which had been unprofit- 
able was not a " safe " investment, pp. 690-692. 

« Brief, pp. 219-221. 

7 Railroad Valuation, p. 77; Kansas City Southern, 1 Val. Rep. 223, 257. 

The failure to charge interest against land (the purchase of which is an obvious first 
cost) is due to adherence to the letter of the opinion in the Minnesota Rate cases: " it 



39 

experts evolved much more intricate and more ingen- 
ious formulae,^ and Mr. Prouty, in his Memorandum, 
expressed the opinion that a fairer basis would be to 
calculate interest for half the construction period plus 
three months on construction accounts, and for three 
months on the equipment accounts. ^ Changes in the 
Texas Midland, Winston-Salem Southbound and Kan- 
sas City Southern figures were made upon this basis. ^ 

The construction period depends entirely upon the 
opinion of the Commission's engineer, upon his repro- 
duction program, and thus ultimately upon the repro- 
duction hypothesis. Since the reproduction represents, 
theoretically, an entirely new project, the actual con- 
struction period is not of binding significance. The 
Bureau engineer has decided upon the period within 
which the work might be economically done, recognizing 
the usual delays due to labor and market conditions, but 
barring delays due to financial troubles, etc. And his 
opinion has governed.^ 

III. Depreciation 

Cost of reproduction less depreciation introduces new 
elements into the hypothesis. The railroad, " theoreti- 
cally reproduced '^ in a new condition, is next (and im- 
mediately) theoretically worn to the age and condition 
of the existing road and equipment.^ Not that cost of 

was error to add to the amount taken as the present value of the lands, the further sums 
. . . interest during construction." 230 U. S. 352, 455. See Hearings, December, 1917, 
pp. 17, 128 (Mr. Farrell); Texas Midland Brief, p. 681; A., B. & A. Brief, p. 637; Kan- 
sas City Southern Brief, p. 220; and the individual Protests. 

1 Texas Midland Brief, pp. 687-689, citing testimony of Mr. A. W. Newton, Hear- 
ings, March, 1917, p. 298; and of Mr. A. L. Conrad, p. 306. 

2 Pp. 45-47. There is more extended discussion in the Texas Midland opinion, 
1 Val. Rep. 1, 155-158. 

» Ibid., pp. 1, 33, 196, 257. 

4 Texas Midland, 1 Val. Rep. 1, 32; Kansas City Southern, 1 Val. Rep. 223, 256. 

B The following excerpt from the A., B. & A. Hearings is quoted in the A., B. & A. 
Brief, pp. 330, 331: 

Mr. Brantley: *' Well don't you think it is rather a contradictory statement to say 
that on June 30, 1914, the property had just been completed new, and the cost to re- 



40 

reproduction less depreciation reproduces the railroad 
with second hand materials. Where, for example, can 
one find " the millions of second hand ties " — unless, 
to be siu*e, they are made available by the '^ mental 
obliteration '^ of the existing roadbed ? ^ Nor is repro- 
duction cost determined in terms of the selling price of 
second hand materials.^ On the contrary, cost of repro- 
duction less depreciation seeks to measure how much of 
the h3T)othetical present investment (cost of reproduc- 
tion new) remains unimpaired after the new plant units 
are assumed to be worn and aged to the condition of the 
existing units. 

Appraisal of accrued depreciation, or the determina- 
tion of hypothetical depreciation measured in terms of 
accrued depreciation, is much comphcated by the fact 
that obsolescence ('^functional depreciation") is so im- 
portant a consideration in railroad operations. Prog- 
ress of the arts has quickened the force of the inevitable 
physical w^asting. '' The steel bridge has been removed 
because it could no longer carry the heavier rolling stock 
which modem methods of operation have rendered im- 
perative. Cars and engines have been discarded, not 
for the reason that further repairs could not be made, 
but rather because the type had become obsolete." ^ 

produce is $22,546,132, and that on the same data, it is in a depreciated condition . . . 
$17,960,584 ? " 

Mr. Jones: " Why there is some theory in the proposition, of covirse, and the theory 
is that you are reproducing it on that basis — you reproduce it new, and that theory, of 
course, is an estimate on certain assumptions. Part of the property is there and has 
been there, and depreciation is estimated on the basis of what is there." 

1 Condition Per Cent, W. G. Brantley, pp. 11, 32; see also A., B. & A. Brief, pp. 
454, 461, 547, 548, and testimony of Mr. C. S. Churchill of the Norfolk & Western, 
quoted, ibid., p. 523. 

» Texas Midland, 1 Val. Rep. 1, 69, 70. 

» Texas Midland, 1 Val. Rep. 1, 127; see also Hearings, June, 1917; and especially, 
the testimony of Mr. D. F. Crawford, general manager of the Pennsylvania Lines West, 
p. 21. The carrier attorneys have sought, at great length, to demonstrate, what no one 
has seemed disposed to deny, that retirements of equipment have been made for inade- 
quacy, and that seldom, except ** to keep a series complete," has equipment been re- 
placed in kind. 



41 

Because the railroad business is in this " dynamic " 
state, the data upon which to calculate for the future 
are rendered slender. There is, for example, substan- 
tially no information upon which to gauge the probable 
working life of steel equipment. Surely experience with 
wooden cars is inconclusive. It is even conceivable, as 
says the Commission, that electricity may supplant 
steam as a motive power, or that some discovery may do 
away with both steam and electricity.^ " Total Ufe '' 
calculations from the nature of the case, therefore, in- 
volve prophecy, and introduce a second source of 
uncertainty into the appraisal of depreciation.^ 

The Commission has met the difficulty created by the 
importance of obsolescence by giving the benefit of the 
doubt to the railroad. Only imminent fimctional de- 
preciation is considered. If a bridge is too fight for the 
equipment, and should be removed, or if station facifi- 
ties are too small for the business, " the depreciation has 
already taken place." Likewise, "if for example the 
railroad has already begun to remove bridges of a 
similar type, because they are too light, this fact must 
be considered." Or, " if, while the station may do for a 
few years to come, plans are already being considered 
for its replacement, the architect must not close his eyes 
to this circimastance, and look only to the physical 
condition of the property." But only that functional 
depreciation which can be " accurately forecast " is 
considered. There must be no resort to " speculation." ^ 

» Texas Midland, 1 Val. Rep. 1, 127. 

« See Railroad Valuation, p. 78 and following, for an elaboration of the discussion 
here so briefly outlined. 

* Texas Midland, 1 Val. Rep. 1, 127, 128; see also the discussion by Messrs. Brantley 
and Prouty, Hearings, September, 1915, p. 48. Mr. Wells, the general manager of the 
Texas Midland, introduced the instance of a bridge on his road in which, he insisted, 
there could be no functional depreciation since it was capable of handling much heavier 
loads than in all probability would ever be turned over to the road. Hearings, March, 
1917, p. 858. In Condition Per Cent, Mr. Brantley asserted (but did not prove) that 
there was " no justification " for considering possible obsolescence of equipment in fixing 
a figure of depreciation, p. 17. 



42 

So, for example, neither excavation in cuts or tunnels, 
nor embankments, have been depreciated, altho it is 
quite within the realm of probabiUties that changes of 
Une in curvature elimination or grade reduction, such as 
those which gave rise to the Kansas City Southern 
controversy, 1 may be of importance in the future, as in 
the past. 

Even where standard normal life figures have been 
promulgated, recognition of the fact that maintenance 
and ser\dce factors necessarily govern the individual 
case has led the Commission to permit its engineer to 
fix the total life for items of plant inspected.^ The logic 
of this practice is e\ddent enough when it is reahzed 
that the standard figure is itseK only an average " esti- 
mate,'^ based upon " observation,'' and " opinion," and 
a great '^ amount of study . . . mainly in the way of 
collecting statistics." ^ How the figures reported in the 
Engineering Board Memorandum were fixed upon is 
perhaps adequately explained by the Commission: 

It has been said that the average life of steel bridges in this coun- 
try has not exceeded 30 years. This may be true; our studies would 
indicate that some comparatively short period would represent the 
active service life of that structure; but it is also perfectly evident 
that this has been due, not to the actual wearing out of the bridge, 
but to its inadequacy. It is further not apparent that the same 
cause wiU be operative to the same extent in the future. 

1 Kansas City Southern Ry. Co. v. U. S., 231 U. S. 423. See also Mr. Prouty's dis- 
cussion of the surplus, Eastern Advance case of 1910, 20 I. C. C. 243, 271, quoted, 
Railroad Valuation, p. 116. 

2 " Let it now be assumed that the same kind of a structure which has been in place 
for 30 years is under inspection. Observation shows that this structure, either through 
lack of proper maintenance or due to its location or from some accident of its use, is 
badly corroded and otherwise worn. If the same rate of depreciation continues for 
another 10 years the structure must be replaced. In this case the engineer would reduce 
the probable life from 70 years to 40 years; the bridge would be three-fourths worn out 
and its condition per cent would be 25/100. 

Upon the other hand, an observation of this structure might show that it had been 
perfectly maintained and at the end of 30 years was apparently as good as at the begin- 
ning. The engineer might feel that this bridge was likely to continue in service for more 
than another 40 years, and in that event he might increase the total life as a result of his 
inspection from 70 to 80 years. The condition in this event would be not 40/70 but 
50/80." Texas Midland, 1 Val. Rep. 1, 129. 

» Ibid., p. 126. 



43 

Thirty years is not, therefore, used as the total life by which steel 
bridges are to be depreciated. There is no way in which a satisfac- 
tory total life can be fixed for a structure of this character, but the 
engineers have decided that, taking all things into account, 70 years 
will probably fairly represent that period; certainly it is sufficiently 
long for an average life, and this figure for total life is used in the 
depreciation of steel bridges.^ 

And, upon the same basis, concrete and masonry (the 
use of the one being substantially in an experimental 
stage, so far as length of hfe is concerned) are assigned a 
normal life of 100 years; timber structures, of 50 years; 
cast iron culvert pipe, a normal life of 80 years, and other 
steel or iron pipe, of 30 years. ^ Rails are held normally 
to have two cycles of life: new to relay; and relay to 
scrap. The first cycle for a particular carrier (or for a 
particular division of the same carrier) is determined by 
a statistical study of rail renewals; the second cycle, on 
the basis of 50 years, etc., etc.^ How conclusive this 
study of rail renewals may be is indicated by the con- 
tentions in the Texas Midland case. Twenty-five years 
was originally fixed upon by the Commission's engineers. 
Mr. Wells, the General Manager, claimed 80 years, but 
the tentative valuation reported figures based upon the 
25-year normal life. After conferences, the Bureau 
reconmiended an increase to 40 years, and figures cal- 
culated on this hypothesis were made " final '' by the 
Commission's order, which recognized that " no definite 
figure can be named with absolute certainty." * 

The inventory inspection has served to set the actual 
life standard used (where the normal has been departed 

» Texas Midland, 1 Val. Rep, 1, 128. 

* Engineering Bdard Memorandum, No. 226, ibid., p. 184. The same normal life 
(100 years) is assigned to masonry in such different structures as timnels, culverts, 
piers and buildings. 

» Ibid. It is provided also that rail originally laid new in side tracks, and to be used 
in this service until scrap, shall be given a normal life of 75 years. 

* Ibid., p. 52. The opposing contentions are discussed, Hearings, March, 1917, pp. 
855, 872. 



44 

from) and has furnished the data from which the cost of 
reproduction less depreciation figures have been cal- 
culated. Instructions provide for careful and detailed 
notes of observation covering the age, wear and tear, 
maintenance and probable service life of the inventory 
units.^ Some short cuts have been invoked. Where 
renewals have become uniform in quality and quantity, 
the service condition (i. e., the percentage of cost of 
reproduction now reported as cost of reproduction less 
depreciation) of ties '^ shall be considered as 50 per 
cent,'^ while, under similar conditions, for rails in yards 
and for frogs and switches " a service condition of 50 
per cent may be used." ^ AH locomotives and all pas- 
senger cars are inspected, but " ordinarily not less than 
10 per cent " of the freight cars ('' and as many more as 
may be necessary to furnish a fair basis "), in order to 
seciu-e a standard of condition to be apphed to the 
entire series.^ Sphce bars and bolts are '' depreciated in 

1 Instructions for Field Work, etc.. Roadway Branch, p. 8; Bridge Branch, p. 10; 
Building Branch, p. 10, etc. For ballast " no mortality tables or statistical data were 
available," and entire resort was had to observation. Texas Midland, 1 Val. Rep. 1, 83. 

2 Engineering Board Memorandum, No. 226, Texas Midland, 1 Val. Rep. 1, 184. 

3 Instructions for Field Work, etc.. Mechanical and Electrical Branch, p. 10; see 
Hearings, January, 1917, p. 175; March, 1917, p. 861; and Protest, N. O., T. & M., p. 17. 

For equipment, which by repairs and renewals, many witnesses (Mr. Julius Krutt- 
schnitt, Hearings, March, 1917, pp. 309-323; Mr. J. E. Muhlfeld, p. 743; Mr. Harry 
T. Bentley, p. 803; Mr. C. E. Chambers, p. 763) testified could be indefinitely continued 
in service, and for which therefore they alleged that it was impossible (especially in 
view of the instructions of the Commission to ignore all except " imminent " obsoles- 
cence) to fix a total life, the Commission has fixed a " weighted average condition per 
cent ": 

" While the life of the car itself may be indefinitely prolonged, the different parts of 
that car wear out and must be replaced. The car is therefore divided into three such 
parts, the trucks, the imderframe, and the body, and each one of these parts is depre- 
dated by itself. The three are then combined into a weighted average from which the 
condition per cent of the car is determined. The weighted average may be taken itself 
as the condition per cent or may be reduced if the type of the car is such that its use will 
not be continued in the future. 

" The same rule is applied to locomotives and other rolling stock and also in a degree 
to certain buildings and structures." Texas Midland, 1 Val. Rep. 1, 53; compare 
testimony of Mr. Prouty, Hearings, March, 1917, p. 861. 

An invalid objection is raised to this method by Mr. Brantley (Condition Per Cent, 
p. 17) alleging that " inconsistent residts . . . will depend upon the date of the valua- 
tion," on account of additions by shopping, etc. 



45 

cycles on the same basis as the rail with which they 
are used"; spikes, ^' on the same basis as the ties." ^ 
And, altho it is stated as a governing ^' principle " that 
labor depreciates with the items of property of which 
it is a part, engineering, largely a labor cost, is not de- 
preciated.2 

The carriers have attacked, not the statistical ade- 
quacy of the depreciation figures, but the premises 
upon which the Commission's engineers have worked, 
and upon which, therefore, the depreciation figures are 
predicated.^ The difference is one of fundamental defi- 
nition.* " The witnesses called by the carriers — men of 
candor, abihty and experience — while fully recognizing 
deterioration from age and use and the necessity of 
repairs and replacements of perishable elements, state 
that in the absence of deferred maintenance^ there is no 
depreciation J^^ Deterioration is not depreciation; dete- 

1 Engineering Board Memorandum, No. 226, Texas Midland, 1 Val. Rep. 1, 184, 
185. 

2 Ibid., pp. 183, 151. The other overheads are depreciated (p. 153); tho the reason 
assigned for failxire to depreciate engineering (a cost spread over the whole of a depre- 
ciated plant), that of difficulty, would seem to apply with equal validity. 

' The Kansas City Southern, " solely for the purpose of comparison with the results 
reported by the Commission," since the carrier denied " the right of the Commission to 
deduct any sum or amount whatsoever from the Cost of Reproduction New," and in- 
sisted " that there was no depreciation as of Jime 30, 1914," introduced a table compar- 
ing a " carrier's Condition Per Cent " (relating " to different pieces or elements of the 
railroad property when considered separately and not as a part of a going concern ") 
and the " Commission's Tentative Condition Per Cent." Protest, pp. 43-45. For 25 
of the 30 accounts the carrier figures were higher than the Commission's figures, and 
for 4 of the remaining 5 the difference was less than 2 per cent. For 9 of the 25 accounts, 
the difference was 5 per cent or under, for 7, 6-10 per cent; for 3, 11-15 per cent; for 3, 
21-25 per cent; for 1, 32 per cent, and for 1, 34 per cent. In terms of dollars, the dif- 
ferences would be more considerable, since applied to higher carrier figures. 

* Texas Midland Brief, p. 743; Texas Midland, 1 Val. Rep. 1, 48. 

8 Texas Midland Brief, p. 743, also p. 247. The most notable witness was Mr. Julius 
Kruttschnitt, Hearings, March, 1917, beginning at p. 309. The following excerpt from 
his testimony is typical: 

Mr. Brantley: " Mr. Kruttschnitt, as a maintenance man, I would like to ask you 
this question. If a government inspector went over your road and reported, for instance, 
that your track, that is, the ties and raUs and so forth, was in 80 per cent condition or 



46 

rioration exists only in simple properties, there being no 
depreciation in a composite property, say the track, 
consisting of partially worn (deteriorated) rails, ties, 
fastenings, etc., unless repairs and replacements have 
been neglected. The whole is something more than the 
sum of its parts. ^ 

The carrier interests, using the fundamental defini- 
tions of depreciation and capacity for service promul- 
gated by the Commission's engineers, have sought to 
apply these definitions to their own depreciation con- 
cept. The Commission's definition of depreciation — 
" the lessening in worth of physical property due to use 
or other causes " ^ is unfortunate, since, in a going con- 
cern where the units of plant do not come on the market 
as second hand, depreciation measures, not a lessening of 
worth {" value," in the sense of selling price), but the 
portion of the investment used up in furnishing past 
services.' The carriers have therefore quite justly 

85 per cent condition, what would you conclude that he had found with respect to your 
obligation of maintenance — that you had neglected it for a year or two ? " 

Mr. Knittachnitt: " Fifteen per cent deferred maintenance is a great deal, a very 
great deal, according to the figures read out here. It is a year and a half maintenance on 
one system of ours and a year and a quarter on the other. Knowing our system as I do, 
I should be very skeptical, and should, if permitted, confer with him, and ask * I want 
you to show me how you have reached this conclusion.' Assuming that our track had a 
million ties in it, 15 per cent depreciation or deferred maintenance would mean that our 
officers had failed to put in 150,000 ties that they should have put in, and I should ask 
the inspector to walk over the track with me and show me the ties that he thought ought 
to come out. If he did so I should be much disappointed because our people had not 
obeyed instructions, but I could not find any favdt with his conclusion. On the other 
hand, if he could not show them I should conclude that he was in error. 

Mr. Brantley: " So that as a maintenance man you would understand his statement 
that your track was in 85 per cent condition to mean that there was 15 per cent there of 
neglected maintenance ? " 

Mr. Kruttschnitt; " Yes." 

Director Prouty: " You could not put any other construction on it ? " 

Mr. Kruttschnitt: " No. I cannot conceive what other construction I could put on 
the language." P. 316. 

1 See Railroad Valuation, pp. 122-124, and especially the excerpts there quoted 
from the Carrier Valuation Brief of 1915, pp. 162, 166, 231-237; the Protests of the in- 
dividual carriers, Texas Midland, pp. 24, 25, A., B. & A., pp. 66-68, 80; and Hearings, 
September, 1915, p. 35. 

2 Engineering Board Memorandum, No. 226, Texas Midland, 1 Val. Rep. 1, 183; 
see also the discussion, p. 125 and following. 

3 Depreciation is thus the accounting recognition of the " ripening " into product of 
a part of the savings embodied in the plant: an adequately accumulated depreciation 



47 

maintained that the Commission has enunciated a 
definition in terms of worth, or value, only to report 
figures in terms of a loss of service units, or of the ex- 
haustion of '' capacity for service, '' itseK an ambiguous 
phrase.^ This ambiguity, also, the carrier has hit upon. 
^^ A locomotive twenty years old . . . will pull the same 
load,'' 2 and the track composed of haK worn materials 
possesses as much capacity for service (i. e., as many 
trains can be run over it per day) as an entirely new 
track.3 ^' It would be folly and waste to attempt to 
have all of the parts new all the time." * Its " value in 
use " is as great as that of a new track. ^ " The value of 

reserve measiires the extent to which the " ripening " process has gone; the difference 
between investment and this total accumulation measures unimpaired investment. See 
Railroad Valuation, pp. 117, 118, 

Mr. Jones, the Commission's District Engineer in charge of the A., B. & A. work 
defined depreciation as " expired cost." Quoted, A., B. & A. Brief, p. 453. 

1 Texas Midland Brief, p. 743. Mr. Brantley had, however, defined depreciation as 
" the loss in service life." Hearings, May, 1915, p. 85. 

« Texas Midland Brief, p. 730. 

» Condition Per Cent, W. G. Brantley, p. 23, also pp. 8, 9. 

This meaning of capacity for service is not the meaning attached to the words by the 
Commission. This should be clear from the explanation: 

" The bureau has treated depreciation as the exhaustion of capacity for service. It 
has inquired how much of such capacity existed when new, what part stiU remains. It 
states the remaining capacity as a fraction of which the total is the denominator and the 
part remaining the numerator. Taking cost of reproduction new the depreciation which 
has already accrued is subtracted, due consideration being given to salvage or scrap 
when this exists, and the remainder is given as cost of reproduction less depreciation." 
Texas Midland, 1 Val. Rep. 1. 

* Texas Midland Brief, p. 744; see discussion by Mr. Brantley, Hearings, May, 
1915, p. 77 to the same eflfect. 

6 Mr. Brantley, ibid., p. 67, cites the Backus case, where the Supreme Court said, 
154 U. S. 430, " And when the statute provides that such property shall be assessed at 
its true ' cash value ' it means to require that it shall be assessed at the value which it 
has as used and by reason of its use." He then continues, " We are of the opinion that 
the value to be ascertained is the value of the property as used and by reason of its use. 
If this be sound, it would follow that the depreciation to be ascertained in * cost of 
reproduction less depreciation ' is that deterioration in physical property whereby its 
value in use is affected." 

In his Condition Per Cent, p. 10, Mr. Brantley said: 

" A railroad property cannot be maintained and its full ' capacity for service ' con- 
tinued, except by a constant and continuous replacement of its various plant units. The 
thing sought is not a continuous condition of newness for each plant unit, but is a con- 
tinuous condition of full and complete * capacity for service.' A plant unit with its 
* full capacity for service ' existing at the date of valuation, cannot be said to be de- 
preciated because its ' capacity for service ' will expire two, four, eight or twenty years 
hence. Its ' fvdl capacity for service ' existing on valuation date, there is no deprecia- 
tion then existing, and the fact being that whenever its ' capacity for service ' ends, the 



48 

the investment is measured by the service that the com- 
bination of the various plant units in use can render, and 
so long as this service continues complete for the pur- 
poses desired, there is no loss in worth of investment, 
and hence no depreciation." ^ In " normal service con- 
dition " the track, composed of deteriorated simple 
properties, possesses its ^^ full capacity for service"; 
and the same is true of adequately maintained equip- 
ment and structures.2 In Ueu of the ^' impossible guess- 
ing about the future Ufe of a property," the carriers 
would estabhsh " a proper standard of operating con- 
ditions for each railroad property," depreciation to be 
noted only to the extent to which the owner has allowed 
the property to depart from that standard of unity or 
100 per cent.^ Plant worn to the normal state of depre- 

carrier will not be called upon to make any new investment of capital in order to obtain 
a new plant unit to take its place, but may charge the cost of same to operating expenses, 
such futiu-e depreciation cannot affect the value of the investment on the date of 
valuation." 

1 Condition Per Cent, p. 7. See also Protests, Individual Carriers. 

2 Ibid., p. 32. See also A., B. & A. Brief, p. 527; and Texas Midland Brief, pp. 718, 
(ties); 724 (equipment); 725 (bridges, trestles, and structures). In Condition Per 
Cent, Mr. Brantley even insisted that replacements caused by obsolescence involved 
" no suggestion of loss of capacity for service," p. 15. 

3 Hearings, September, 1915, p. 44; also Texas Midland Brief, p. 722, where, 
premised upon Mr. Kruttschnitt's testimony, it is stated, " The same standard, that is 
unity of 100 per cent, should be used for all railroads and the principles to be followed are 
general and apply equally well to the Pennsylvania, New York Central, A., B. & A., 
Texas Midland, or any other raUroad." The proposed process of determination can be 
given in Mr. Kruttschnitt's words: 

" The questions asked by the Commissioners evidence the difficxilty they seem to 
encounter in prescribing what is the proper standard of maintenance as to ties — that 
might be made general; I simply take ties as an Ulustration — to which the condition of 
roads under valuation should be referred. The same standard — that is, unity, or 100 
per cent — should be used for all roads and the principles to be followed are general and 
apply equally well to the Pennsylvania, New York Central, A., B. & A., Texas Midland, 
or any other road, and is the method I have used on more than one occasion when re- 
porting on roads the purchase of which was imder consideration by our company. 

"1. Determine total number of ties in the track to be valued. 

' ' 2. Determine, preferably at the time just after the annual renewals have been com- 
pleted, how many ties remain in the track that should be removed at that time. This 
count to embrace either the entire mileage or typical miles from which the count on the 
whole road could be deduced. 

" 3. Determine the average life of ties from the records of the carrier to be valued, or 
if these are defective, determine the information from the best available sources. 

" For illustration, let us assume that there are 1,000,000 ties in the road to be valued, 
and that their average life is 10 years, from which it foUows that depreciation wiU be 



49 

elation (or what the raihoads call deterioration) would, 
if maintained to the standard set, be reported as unde- 
preciated. Cost of reproduction new and cost of re- 
production less depreciation coincide.^ So runs the 
carrier plea. 

But all this assiunes that maintenance in a state of 
working efficiency is maintenance of the investment. 
Investment (or hypothetical investment, cost of repro- 
duction) is made in terms of dollars, and can only be 
measured in terms of dollars. Maintenance of the in- 
vestment is attained through " putting earnings back 
into the property '^ equal to the amount of original 
investment used up in furnishing current services, how- 
ever true it may be that a state of working efficiency 
(ability to turn out ton-miles in a given period) has been 
the ideal sought by the engineer to whom the financier 
has delegated the problem of establishing operating and 
maintenance standards. But the cost of much existing 
railroad plant has been charged to operating expenses 
and maintenance in the past. Extensions and equipment 
purchases have been financed out of earnings. It is 

fully offset and arrested if the annual renewals are substantially 100,000 ties. If on in- 
spection and count the conclusion is reached that the number of ties to be removed is 
negligible, it proves absolutely, without further relying on the judgment or estimates of 
any inspector, that all necessary renewals have been made, depreciation fully arrested, 
and the condition of the ties standard, or 100 per cent. 

"4. If actual count shows that 50,000 ties should be removed after annual renewals 
have been made, it shows that the unarrested depreciation is 50,000 divided by 1,000,000 
or 5 per cent. If the number of ties to be removed amounts to 175,000, the depreciation 
is 175,000 divided by 1,000,000, or I7i per cent. If the number to be removed is 500,000, 
the depreciation is 500,000 divided by 1,000,000, or 50 per cent." 

1 Mr. Brantley summarized his contention: 

" As to any piece of property which could not on the date of valuation be reproduced 
under a rational and reasonable engineering program, for less than its cost new . . . 
that the cost of reproduction less depreciation must be the same figure as the figure of 
cost new." A., B. & A. Brief, p. 465. He had previously said, p. 439: 

" The carriers have for four years been combatting this theory. Their contention is 
that the direction given the Commission by the valuation act is to report, not two fig- 
ures but one figiu-e, and that a cost figure. In other words, that the act directs the 
Commission to ascertain first the cost of reproduction new of the property, which is a 
cost figure, and then to ascertain the cost of reproducing it in its existing condition, 
which involves a consideration of how much less than new cost, if any, the property can 
be reproduced for because of the existence of depreciation, if any." 



50 

entirely possible that, in an entirely haphazard manner, 
the level of luiimpaired savings embodied in the total 
plant may even have been increased, tho a state of work- 
ing efficiency has been the ideal actually sought. ^ 

It is recognized, moreover, that, when a large and 
varied plant, such as a railroad, is worn to a state of 
normal depreciation {" deterioration ")j a formal de- 
preciation reserve is not needed except for clearer exhibi- 
tion of the facts. 2 Until formal insistence on the part of 
the Commission, against which vigorous protest was 
made by carrier representatives, depreciation reserves 
for equipment were rare indeed.^ Bookkeeping was 
simplified by charging replacements to operating ex- 
pense (maintenance) in preference to setting up a 
depreciation reserve, against which replacements should 
be charged. The effect of this confusing short cut has 
been to create, in the minds of some railroad men, the 
idea that they have a " right " to make needed replace- 
ments out of current earnings; that the entire cost of a 
new rail or car bought in 1915 is a part of the cost of 
producing transportation in 1915. As a matter of fact, 

1 See discussion at length, Railroad Valuation, pp. 108-124; and compare testimony 
of Mr. Kruttschnitt, Hearings, March, 1917, p. 314; of Mr. A. H. Plant, comptroller 
of the Southern Railway, ibid., p. 843. Mr. Plant said: 

" Before the depreciation account was born, on the Southern Railway, we realized 
the necessity for taking care of our maintenance and retirements, and we really had in 
practice a depreciation not determiued, however, as scientifically as subsequently deter- 
mined by the Commission. When we retired a car on the Southern, we charged the cost 
to replace it with a modern car to operating expenses, and in that way we did practically 
what we are doing now under the Commission's depreciation rule. I was quite anxious 
after the rule was promulgated by the Commission, to see how the two methods agreed, 
and I went back and applied the Commission's rule to a period back of the time it was 
promulgated, and compared it with the results I obtained under the Southern's old 
method and it surprised me to find the results were very nearly the same." 

2 Railroad Valuation, pp. 109, 119; see the extended discussion by Messrs. A. A. 
Young, J. S. Davis, John Bauer, and J. C. Bonbright, " Depreciation and Rate Control," 
Quarterly Journal of Economics, vol. 28, p. 634; vol. 29, p. 362; and vol. 30, p. 546. 
The writer accepts the reasoning of Professor Davis. The concept of the " useless " 
depreciation reserve (useless because permanent) is referred to in the A., B. & A. Brief, 
p. 515. 

« See, for example, three articles by William Mahl, Railroad Gazette, vol. 43, p. 418; 
RaUway Age Gazette, vol. 48, pp. 440, 1249. 



51 

the cost of the old rail (not the cost of the new rail which 
represents new investment) was properly chargeable 
against the cost of producing transportation throughout 
its service life. The cost of the new rail is not significant 
for cost of past service. Practice omitted the formal 
credit to depreciation reserve, and, if attending to the 
detail at all, assumed that the amounts spent for main- 
tenance and replacements balanced the accruing depre- 
ciation. But the fundamental reasoning reverts to the 
place in the whole productive process of machinery, of 
capital goods — of which the railroad, properly con- 
sidered, is a typical illustration. The whole case is 
granted when it is acknowledged that " accrued dete- 
rioration necessarily exists in any well maintained rail- 
road.'' 1 Railroad plant, half worn out, occupies the 
same economic position as the haK worn pump and 
pipes of a water plant.^ That portion of its cost properly 
assignable as cost of producing past services has been 
used up. The adequacy or inadequacy of past account- 
ing methods are not in question, tho it is conceivable 
that they may raise ethical rather than economic ques- 
tions.3 But maintenance of investment is made in terms 

1 Texas Midland Brief, p. 399; see A., B. & A. Brief, p. 550. 

2 The following quotation from Mr. Brantley's Condition Per Cent, p. 14, seems to 
grant the whole case, when considered in terms of proper economic definition: 

" It may well be that in the case of a large and expensive pump used by a water 
company, that a reserve fund should be acteumulated with which to replace it when its 
service life, by reason of its inadequacy, is finally ended. It may well be also that long 
stretches of water mains laid at one time will have their serAace life expire at one time, 
and that the cost of replacing them, as in the case of the pump, would be greater than 
could be paid for as an ordinary operating expense. In such case it would be proper to 
have a depreciation reserve also, and in both these cases it might well be that on any 
given date, by reason of a recognized approaching day for a renewal, that neither of these 
properties could be given its cost new value. In the case of a railroad, however, its parts 
are being so constantly renewed, that it is found simpler and more practical to charge the 
cost of such renewals directly to operation. The vital thing in both cases is to continue 
the service and at the same time to preserve the value of the investment for service 
giving. If a continuous service is preserved, and can be indefinitely preserved by the 
railroad through its method of replacements, it follows that there is no loss of worth in 
its investment by reason of the age of its plant units." The answer to these assertions is 
simply that they are beside the point. 

3 Railroad Valuation, pp. 121, 122, and references there cited. 



52 

of dollars, not in terms of operating efficiency. ^ That 
Mr. Kruttschnitt, ^^as a maintenance man . . . would 
understand the statement that . . . (his) track was in 
85 per cent condition to mean that there was 15 per 
cent there of neglected maintenance," simply estab- 
lishes " railroad usage, custom, and practice." ^ it is 
useful for no other purpose, except as evidence of the 
inadequacy of that usage and practice when an appraisal 
of accrued depreciation is in process. The difficulty 
rests in an inability or unwillingness to recognize a dif- 
ferentiation of concept when the selfish interest can re- 
fer to an unscientific and loose phrase of professional 
speech. To show the economic facts is not to confiscate.^ 
The Commission's conclusion is sound, however imcer- 
tain its reasoning. 

IV. Land 

The present value of land, as made final by the Com- 
mission, is based upon a conscious attempt to apply 

1 It is significant of the difference in point of view, as well as indicative of the ambigu- 
ity of the Supreme Court opinions that the following quotation from Knoxville v. Water 
Co., 212 U. S. 1, shoidd have been cited by Mr. Brantley (who follows the citation with 
the argument that a condition of continued newness is impossible, and that, therefore, 
maintenance from earnings must mean replacements, which being made keep the in- 
vestment imimpaired), and by the Commission. Texas Midland, 1 Val. Rep. 1, 49, 
where the Commission, satisfied to cite authority, including the Railway and Canal 
Commission of Great Britain, approved and adopted " the definition of depreciation 
applied by the bureau." 

In the Knoxville case, the Supreme Court said: 

" Before coming to the question of profit at all the company is entitled to earn a 
sufficient sum annually to provide not only for current repairs, but for making good the 
depreciation and replacing the parts of the property when they come to the end of their 
life. ... It is entitled to see that from earnings the value of the property invested is 
kept unimpaired so that at the end of any given terms of years the original ravestment 
remains as it was at the beginning." 

See also discussion of Mr. Brantley and Commissioner Hall, Hearings, September, 
1915, pp. 41-46. Mr. Brantley, quoting Justice Hughes, in the Minnesota Rate cases, 
" It woidd seem to be inevitable that in many parts of the plant there should be depre- 
ciation, as, for example, in old structures and equipment on hand," sought to establish 
the rule, as a rule of the Supreme Court, that only accrued depreciation of old structures ^ 
and equipment which he sought to identify with deferred maintenance, should be de- 
ducted. The argument was not duplicated in later discussion. All in all. Commissioner 
Hall's questions were pertinent and indicated an understanding of the real problem. 

« Hearings, May, 1915, p. 73. 

3 Texas Midland, 1 Val. Rep. 1, 47-52; Kansas City Southern, 1 Val. Rep. 223, 258. 



53 

dicta expressed by Justice Hughes in the Minnesota 
Rate cases : 

Assuming that the company is entitled to a reasonable share in 
the general prosperity of the communities which it serves, and thus 
to attribute to its property an increase in value, still the increase so 
allowed . . . cannot extend beyond the fair average of the normal 
market value of land in the vicinity having a similar character.^ 

Justice Hughes really decided nothing when he used 
these words, for the conclusion is quahfied by an as- 
sumption neither approved nor disapproved. This fact 
Mr. Prouty, and the Commission, following Mr. Prouty, 
have ignored. Where Mr. Prouty foimd authority for 
his assertion that " the decision expUcitly holds . . . 
that either an increase or a decUne in the value of land 
must be taken into account/' or for his assertion that 
" in the opinion of the court the carrier was entitled 
to the increase in the value of its lands like any other 
individual/' is not indicated in his Memorandum.^ 
If there is one thing that the opinion did not do, it 
was to reach any decision explicitly about land. It 
condemned what had been done; but it proposed no 
substitute program except that qualified by an assump- 
tion neither approved, disapproved, nor even discussed.^ 
In terms of the assumption Justice Hughes set a maxi- 
mxun, which the Division of Valuation has reported 

The assertion that the deduction of depreciation is " confiscation " appears fre- 
quently in Mr. Brantley's argument. A., B. & A. Brief, pp. 432-434; Hearings, May, 
1915, p. 83; September, 1915, pp. 534; January, 1917, p. 168. At the Hearings, 1915, 
he said: 

" Now to write out one half of the total cost of these ties estimated at $1.00 each, 
amounting to a billion and a quarter dollars — or, in other words, to deduct the accrued 
deterioration which exists in the ties, as I have defined it — would be to destroy half a 
biUion dollars of value. . . . What I want to urge is that if you should write it out, it is 
equivalent to writing out a half a billion dollars of capital and dumping it into the 
Atlantic Ocean, because it is gone. It is gone forever." P. 83. 

1 230 U. S. 352, 455. 

2 P. 55; see Texas Midland, 1 Val, Rep, 1, 53. 

' Railroad Valuation, pp. 90-93; see argiiment of Mr. Max Thelen, Hearings, 
January, 1916, p. 144; and that of Mr. A. E. Helm, ibid., p. 41. 



54 

as present value without analysis of the underlying 
problem: 

Present value ... is arrived at by ascertaining the number of 
acres of land owned or used by the carrier for its purposes as a 
common carrier and multiplying this acreage by a market value 
of similar and adjoining lands.* 

The figure of present value so determined has been 
denominated by Mr. Farrell as "a present value, meas- 
ured in a particular way '' and not as '^ the present 
value.'' 2 No such fine line of distinction was drawn 
by the Coromission. The figures reported as present 
value in the Tentative Valuations of the Texas Mid- 
land, the Winston-Salem Southboimd and the Kansas 
City Southern were, as such, made final.^ 

The methods used in the federal appraisal have 
been adapted from the expedients developed in the pre- 
vious state investigations. Mr. Prouty, who " really 
organized the system," ^ simply took over the sales 

* Prouty, Memorandum, p. 55. 

Compare Mr. Maltbie, reporting for the Valuation Committee, the Nat'l Ass'n 
Ry. Com'rs, Hearings, May, 1915, p. 131: *' Present value . . . should be determined 
from the value of similar adjacent lands; " likewise, the original draft of the act. Valua- 
tion of the Several Classes of Property of Common Carriers, Senate Report 1290, 62d 
Congress, 3d Session, which called for land values measured by the value of adjacent 
lands. 

See the excerpt from Commissioner Daniels' dissent in the Kansas City Southern 
case, quoted below, note, p. 85. 

2 Hearings, March, 1917, p. 706, italics in the original; see discussion, Texas Mid- 
land Reply Brief, pp. 71-76. 

Mr. Farrell also justified the refusal to allow the original clearing and grubbing on the 
ground that 

"... the more clearing done on the adjoining land, the greater the value of the ad- 
joining land, and since the carrier gets the benefit of that improvement in the value placed 
upon the land included in its right of way, it gets paid in increased value of its right of 
way for the amount of grubbing it in fact did in the original construction, more than we 
allow for in reproduction." Hearings, December, 1917, p. 135. 

The Commission ruled to the same effect, 1 Val. Rep. 1, 16. 

8 Such minor changes as were made in the tentative figures represented changes in 
details, not in principle. 1 Val. Rep. 1, 52-62, 199, 200, 258. But see Commissioner 
Daniels' dissent, Kansas City Southern, 1 Val. Rep. 223, 269. 

* Hearings, March, 1917, p. 876. Mr. Prouty said: " I really organized the system 
which we use. I have been in the field. I know how the appraisal is done, and I still 
think I am right." 



55 

method, the sales assessment method, and the opinion 
method, and provided a coordinating and determining 
factor — the independent judgment of a civil service 
appointee (salary $2400-13000 per year).^ 

Thus the actual figiu-es assigned as value are opinion 
figures, just as the unit prices in Cost of Reproduction 
are opinion figures. The parallel in the problem is very 
real: just as the engineer must correlate specifications 
and prices, the land appraiser must correlate the quahty 
of land and the values assigned. This has been done by 
dividing the railroad fine into zones, the length of the 
zone depending upon the substantial similarity of the 
railroad right of way and the adjacent and adjoining 
land, and upon the assumed uniformity of the value of 
that adjacent and adjoining land. But the actual 
figiu-e of value reported has been an opinion figure,^ 
altho the fact that more often than not, perhaps, the 
appraiser has been a stranger in the community (he may 
even be a city real estate expert suddenly required to 
appraise farm lands), would seem to enforce great de- 
pendence upon the sales, sales assessment, and opinion 
investigation. 3 

In the Texas Midland case, the railroad alleged at 
length the weakness of the Commission's basic data. 

1 The investigation of sales includes the sales of adjoining and adjacent lands, and 
also sales anywhere in the country; and for the same year the assessed valuation is 
determined to fix upon the ratio. The opinions of loan agents, dealers, and owners of 
land, other than the owner of the property adjoining, are sought. The idea is to get 
representative opinion. See Kansas City Southern, 1 Val. Rep. 223, 259. 

* Mr. E. W. Reed, the Commission's Senior Appraiser, described his method of 
fixing " values " as follows: 

" I applied to the railway lands a valuation obtained from the valuation of property 
privately owned. My estimates were based on the value of abutting, contiguous similar 
land held in private ownership," quoted. Brief of Glenn Plumb for the Railroad Brother- 
hoods, p. 7. 

The statement was made at the Texas Hearings, for which no printed proceedings 
were available. 

« The appraisal of the Texas Midland lands was made by Senior Appraiser E. W. 
Reed of Nebraska; by Senior Appraiser A. O. St. John of Missouri; and by Land At- 
torney C. F. Newman of Missouri. " Neither was or ever had been a resident of Texas, 
nor had they any acquaintance, or occasion for acquaintance, with the lands in question 
before undertaking their appraisal." Texas Midland Brief, p. 910, 



56 

Indeed, bad faith, evidenced by the deletion of impor- 
tant parts of the testimony and the unfair use of cita- 
tions, exaggeration, undue influence, were charged by 
both sides. The abihties and quahfications of appraisers 
were questioned. The memory of one Commission 
witness was declared to be " so poor that he did not 
remember the existence of the Eiu-opean war,'' etc. 
Another was so nearly bhnd that he could barely read a 
map, etc.^ And the basic data were declared inade- 
quate. Many recorded sales are paper transactions; 
the cheapest lands change hands most frequently; ^ 
forced sales, or sales for the settlement of an estate, 
may show low values; ^ or the consideration shown may 
be more than the real consideration in order that the 
securing of a loan maj' be facilitated.^ Assessments on 
better lands are on a lower basis than upon cheaper 
lands; ^ non-residents are assessed more than residents.^ 
Apprehension of the tax assessor is such that low opin- 
ions of value are given ;^ averages, rough and ready 
figures, rough approximations, ^'office valuations," re- 
sult from opinions not made upon the groimd.^ But 
none of these objections to the data gathered to sup- 
port the appraiser's judgment is conclusive, since, pre- 
sumably, the weakness of the figures is taken into 
account when the value figure is independently derived. 
To meet this claim, the Texas Midland attorneys 
sought to show that, in spite of protests to the contrary, 
the appraisers had actually used an average of the sales, 
assessment, and opinion figures. While it was possible 
to show a close correlation between the imit of value 

1 Texas Midland Reply Brief, pp. 99-109, 128-129, 161-166, 275; C. F. Newman, 
Land Brief, pp. 16-26, 45, 86, 90-95, etc. 

2 Texas Midland Brief, pp. 921, 936; Reply Brief, p. 169. 

3 TexasMidland Brief, pp. 923, 926, 927. « Ibid., p. 941. 
♦ Ibid., p. 933. « Ibid., p. 941. 

^ Ibid., p. 949; at p. 972 it is stated: " It is a general custom in Texas to avoid 
taxation." 

8 Ibid., pp. 955, 967, 997-999. 



57 



fixed upon and a straight average of opinions, sales and 
assessment values, yet so long as the appraisers insisted 
that their own judgment governed the figiu-e set, no 
exhibit, however patent the correlation, could suffice to 
overcome this assertion. ^ It can be said, however, that 
the following table reproduced from the Land Brief of 
Mr. C. F. Newman, the Conunission's Land Attorney, 
to show the independent character of the appraisers' 
work, might as easily be cited to show that the ap- 
praisers based their figures sometimes on averages, 
sometimes on sales, and sometimes upon opinion: 





Opinion 


Kaufman County* (average values per acre) 


Zone 


Sales 


Assessments 




Commis- 












Straight 


ainn's iinif. 






Adjoining 


Adjacent 


Adjoining 


Adjacent 


average 


of value 


18 


$30 


... 


$20 


$45 


$29 i 


$31.06 


$30 


19 


98 


. . . 




66 


78 


80.66 


90 


20 


40 










40.00 


40 


21 


44 


$40 


431 


33 


1 


40.12 


42J 


22 


114 


110 


95 




102 


105.25 


105 


23 


57 


47 


80 


39 


21 


48.80 


55 


24 


73 


63 


80 


63 


63 


68.40 


67§ 


25 


323 


414 


1,387 




480 


651.00 


330 


26 


91 






90 


60 


80.33 


90 


27 


60 


75 


65 


65 




66.25 


65 


28 


68 


68 




55| 




63.73 


65 


29 


69 


56 


60 


75 


66 


65.20 


65 


30 


1,100 


1,154 


845 


730 


1,500 


1,065.80 


1,150 


31 


252 




660 


108 


312 


333.00 


300 


32 


360 


580 


810 


554 


160 


492.80 


400 


33 


1,320 


1,154 


810 


2,150 


4,280 


1,942.80 


1,260 


34 


164 




525 




450 


379.66 


200 


35 


2.650 


4,800 




4,000 


2,060 


3,375.00 


2,650 


36 


9,250 




3.300 


14,000 


4,000 


7,637.50 


9,250 


37 


375 




333 


400 


260 


342.00 


360 


38 


.. . 














39 


68 


50 


"52i 


63 




58.37 


60 


40 


56 


34i 


32 


52 




43.62 


50 



1 See Texas Midland Reply Brief, p. 195 and following, for discussion in detail; also 
pp. 185, 186, 202. 

* Land Brief of C. F. Newman, Texas Midland case, p. 23. At p. 22, Mr. Newman 
says, 

" In some cases the averages do closely approximate the appraiser's units of value 
and there is no reason why that should not be true where there is a sufficient number of 



58 

A more fundamental objection was raised by the 
assertion that the Commission zones contained dis- 
similar land.i It would certainly be an exceptional 
county where land values remained the same along 
seven and a haK miles of hne. The values of farm and 
village land are determined upon different principles 
and zones which contained both included obviously 
dissimilar lands. Urban values, even in the town of a 
few thousand, vary within short distances; to bulk all 
such land in the same zone is to resort to a short cut.^ 
Indeed it would seem that, when the appraisers ac- 
knowledged that the unit values assigned to certain 
zones represented weighted averages, the whole hy- 
pothesis was overturned.^ 

The carrier, in order to eliminate averaging, proposed 
to zone the line in agricultural country upon the basis 
of the ownership of the adjoining farms, and in towns 
to create separate zones " for one or two adjoining city 
blocks.'' 4 The result was greatly to increase the num- 
ber of zones, and to exhibit a range of values within the 

representative opinions, of representative sales and of representative assessments. In 
those cases, it is entirely proper that an appraiser, in arriving at his units of value should 
attach great weight to his record data." 

But see Texas Midland Reply Brief, pp. 98, 187-201, and Mr. Newman's Reply 
Brief, p. 26. 

1 Texas Midland Brief, p. 989; Protest, N. 0., T. & M., p. 36; E., J. & E., p. 38; 
Texas Midland, p. 32. 

2 Zone 47 was 7^ miles in length (Texas Midland Brief, pp. 981, 987, 988); zone 13, 
5 miles; zone 15, 1 J miles; zone 41, 5^ miles, etc., ibid., p. 984 and following. 

' Texas Midland Reply Brief, pp. 141, 142. The following is from the testimony of 
the government appraiser: 

Mr. Craven: " In your opinion the same values existed in the property which ad- 
joined that track." 

Mr. Reed: " The fact of the matter is, the property in that zone was quite spotted, 
and in order to zone it with accuracy as to the exact value of the land, it would have 
been necessary to have cut it up into numerous short zones. In order to save the time, 
and there was no material difference except at small intervals, we concluded to put it in 
one zone and to fix the average value for that distance." 

Mr. Craven: " How did you get at that average ? " 

Mr. Reed: " In a general way." 

Mr. Craven: " Can't you teU me more specifically than that ? " 

Mr. Reed: " I cannot now." Texas Midland Brief, p. 992. 

* Texas Midland Brief, p. 982; also pp. 867, 868. 



59 

zones established by the Commission's appraisers.^ The 
^' naked '' land values were opinion figures fixed by com- 
mittees of local men who " went upon each parcel and 
studied the peculiarities of each piece." ^ The object of 
this appraisal in terms of the value of individual adja- 
cent farms was, however, to fix upon a " naked " land 
value, and to secure figures pertaining to imaginary 
consequential damages.^ The testimony introduced at 
the general hearing of March, 1917, sought, by expert 
opinion backed up with detailed exhibits, to prove what, 
it would seem, no one was disposed to deny — that lands 
are not acquired by railroads '^ for the normal market 
value of the same area of naked land for general, not 
including railway, purposes of similar lands in the vicin- 
ity." This testimony sought also to establish " the 
further fact that the present cost of acquisition by con- 
demnation or purchase of such lands is, and can be, 
determined with a reasonable degree of accuracy";^ 
a thing which Mr. Prouty acknowledged was possible; 
'^ within certain limits." ^ The purpose of this testi- 

1 Texas Midland Brief, pp. 984-992; thus I. C. C. zone 47 (7§ miles) was subdivided 
"by the carriers into 43 zones; and zone 17 into 31 zones, ibid., p. 868. 

2 Ibid., pp. 852, 864, 867-883, 982. The qualifications of the company appraisers are 
exhibited at length, ibid., pp. 852-861. 

3 The carrier's instructions to its appraisers defined " naked land value " as " value 
for general purposes, and does not include value for railway purposes, severance or other 
•damages, improvements, or any other elements of value for which a carrier must also 
pay, nor does it include expense of acquisition." Ibid., p. 865. 

* Ibid., pp. 891, 759. See testimony of Mr. Thomas W. Hulme, Real Estate Agent, 
Pennsylvania Railroad Company, Hearings, March, 1917, pp. 396-409, 443-453 ; of 
Mr. Joseph Beale, " for twenty-five years actively engaged in the purchase of right of 
way for the Pennsylvania " (Texas Midland Brief, p. 763), pp. 454-536; of Mr. F. M. 
GUborough, Tax Commissioner, Missouri, Kansas & Texas Railway, ibid., pp. 536-565; 
•of Mr. H. S. Marshall, Land Assistant, Presidents' Conference Committee, Western 
Group, pp. 582-622, 653; of Mr. W. R. Van Campen, Land Attorney, Eastern Group, 
pp. 622-646; of Mr. Charles Silliman, Engineer, Southern Group, pp. 646-653; of Mr. 
Pearce Horn, Superintendent, Real Estate, Southern Railway, pp. 654-658; of Mr. 
Charles E. Rice, Counsel, A., B. & A. Ry., pp. 658-770; and of Mr. Halford Erickson, 
formerly of the Wisconsin Commission, and later a practicing expert, pp. 670-702. Mr. 
Hulme's testimony is quoted in full, Texas Midland Brief, pp. 764-791. Mr. Erickson 
explained the Wisconsin Commission's use of a multiple, quoted, pp. 840-842. 

6 Hearings, March, 1917, p. 673; see also Prouty, Memorandum, p. 54. To the 
Gommission, however, it seemed " clear " that " there is a marked difference between 



60 

mony was to establish that the hypothetical cost of 
reacquiring the railroad lands could be determined, 
preliminary to insisting that the present value of the 
railroad land be measured by this hypothetical cost of 
acquisition. 

The carrier claim is consistent with the original atti- 
tude of the carriers as voiced in their Valuation Brief of 
1915: ^^ The present value of each piece of land used for 
transportation purposes must be determined upon the 
same principles which govern in condenmation of pri- 
vate property for pubUc use.'^ ^ To uphold this con- 
tention, resort is had to voluminous (and not obviously 
pertinent) quotations from those opinions in which the 
condemnation-regulation analogy was first assumed. ^ 
Without analysis of the real problem, the following 
conclusion is voiced: 

It is clearly settled . . . that the same constitutional provisions 
which protect private propertj'- from seizure for pubhc use without 
just compensation safeguard it against confiscation by the enforce- 
ment of prescribed rates which are arbitrary and too low, and it 
necessarily follows that, unless the Commission shall make valuation 
upon a proper appHcation of the same principles which govern in 
condemnation cases, the purpose of the Act wiU fail, and the findings 
of the Commission will not be admissible in evidence even in the 
classes of cases specified in the Act.^ 

And what are the principles governing the determina- 
tion of land value in condenmation cases ? 

(1) It is the general rule, accepted without question, in condem- 
nation cases, that in determining the value of a strip of land, the 

assuming in advance the total cost of acquisition, whether as the result of condemnation 
and damages paid or of purchase, in excess of the present value of similar lands in the 
vicinity, when no railroad has been constructed or is in operation, and the attempt to 
ascertain and state the cost of reproducing or reacquiring, at the present time, lands 
which actually have been severed from the adjacent property, have been converted into 
a railroad, and are being occupied by an operating rail carrier." 1 Val. Rep. 1, 54. 

1 Carrier Valuation Brief of 1915, p. 273; Texas Midland Brief, p. 194. 

2 Reagan v. Farmers' Loan and Trust Co., 154 U. S. 362; Ames v. Union Pacific, 64 
Fed. 165; Smyth v. Ames, 169 U. S. 466; San Diego Land and Town Co. v. National 
City, 174 U. S. 739, etc. (quotations in Carrier Valuation Brief of 1915, pp. 276-297). 

3 Carrier Valuation Brief of 1915, p. 297; Hearings, May, 1915, p. 107. 



61 

present cost of acquisition of an equally suitable strip or tract of 
land in or through adjacent similar lands, is relevant to the deter- 
mination of such value. 1 

(2) There is a well-established rule of law, which is uniformly 
applied in condemnation cases, to the effect that, if a tract of land 
has a peculiar adaptation for certain uses, this may be shown, and if 
such special adaptation adds to its value, the owner is entitled to the 
benefit of it.^ 

The appraisal submitted by the carrier was made for 
each comity by a committee of three residents, '' chosen 
with primary regard for their quaUfications as citizens 
and judges of land values." ^ With '' personal knowl- 
edge as a basis," the appraisers made a " thoro inspec- 
tion " of the carrier property, a careful examination of 
every farm adjoining the railroad being necessary " for 
the analysis and determination of the extent to which 
that farm was damaged by the taking and use of the 
right of way for railroad piu-poses, and the loss of mar- 
ket value by reason of the existence of the railroad."* 
Damages classified as those due to severance and those 
due to the proximity of the carrier were accordingly 
assessed in detail. The result of this appraisal was to 
fix a naked land value of the lands classified by the 
Bureau as " owned and used for transportation piu*- 
poses " (exclusive of the Delta County lands) amounting 
to $240,025.85; and to fix the damages as $57,906.22.^ 

1 Hearings, May, 1915, p. 315; Texas Midland Brief, pp. 207, 891, citing (p. 209) 
Lewis, *' Eminent Domain," section 706; p. 1227. 

2 Carrier Valuation Brief of 1915, p. 314; Texas Midland Brief, p. 101, 206, citing 
Lewis, section 707; Hearings, May, 1915, pp. 99-101; Notes and Comments, pp. 199- 
201; Protest, E., J. & E., pp. 13, 37; N. 0., T. & M., p. 37. 

3 Texas Midland Brief, p. 852. 

* Ibid., p. 858. The methods of the carrier appraisers are discussed in detail, C. F. 
Newman, Land Brief, p. 44 and following; Texas Midland Reply Brief, p. 118 and 
following. 

6 Ibid., p. 897. Damage due to severance was defined (ibid., p. 894) as " First, the 
damage resulting because of the inconvenience due to the separation of its parts, and, 
second, the loss due to the shape or size of the separated parts." Damages due to 
proximity of the railroad were there defined as those arising " by reason of the risks and 
annoyance incident to the operation of a railroad." The carrier appraisal of the Delta 
and Lamar Coimty lands developed lower figures than those of the Commission. The 
Delta County figures were never placed in evidence by the carrier. Texas Midland 
Reply Brief, pp. 86, 301. 



62 

But it was the figure of naked land value, and not the 
figure including hypothetical damages, which furnished 
the basis for the figures finally claimed by the carrier.^ 
The ^' present value " claimed was calculated by using a 
multiple or factor of 2.23, and adding to this amount 6 
per cent to cover expense of acquisition. The basis of 
this claim was the general exhibit introduced by Mr. H. 
S. Marshall, land assistant of the Western Carrier Group 
at the March, 1917, hearing. Mr. Marshall, using 152 
reports from western roads, which showed the cost of 
acquisition of right of way for 3929.76 miles of line, 
derived a multiple of 2.62 (the purchase price divided by 
the naked land value — $8,941,231.58 divided by $3,- 
411,813.75). The expense of acquiring this land was 
$577,886.05, or 6.16 per cent of the total price. This 
study served to demonstrate, at least in a general way, 
" from the actual experience of these carriers the rela- 
tionship between the naked land value and the total 
cost of acquisition. '' ^ jj^ order to have particular 
figures, '^ careful study was made for the purpose of 
determining the present cost of acquisition of the rail- 
road lands . . . under the pecuHar conditions of soil, 
topography, and community and rural development.^' ^ 
This study was made by Mr. E, Holbrook, of the South- 
em Pacific, who brought to this study ^' long experience 
with the problem," and by Mr. Wilham Malone, a 
Houston real estate dealer, who having acted as real 
estate agent for the Trinity and Brazos Valley could 
derive figures which were " the results of a careful study 

1 Except for the amounts claimed for the land occupied by industry tracks, areas in 
streets, and land alleged to have been omitted. Texas IVIidland Reply Brief, p. 898. 

« Texas Midland Brief, pp. 898, 899. See Hearings, March, 1917, p. 582 and follow- 
ing, and especially the Exhibit at p. 616. It was recognized that, while many of the lines 
contributing to this exhibit were similar to the Texas Midland, many were dissimilar. 
A study of the purely Texas lines gave a multiple of 2.05, which was a logical ex- 
pectation, since the greater part of these lines was located in the plains coxintry of 
West Texas. 

« Texas Midland Brief, p. 900. 



63 

of a practical man, in the light of practical experience in 
the territory of the Texas Midland.'^ Both gentlemen 
testified that the cost of acquisition could not be ac- 
curately estimated by individual parcels, both falling 
back on the multiple short cut — that of Mr. Malone 
(2.23) being adopted " in the interest of conservatism,'^ 
rather than that of Mr. Holbrook (2.25). ^ 

This '^ uncontradicted testimony " was then alleged 
to estabUsh that naked land value of adjacent and ad- 
joining land is much less than the present value of the 
lands, rights of way and terminals of the carrier. It is 
obvious that the " imcontradicted testimony '' did 
nothing of the kind, until it proved in addition that the 
present value of the lands is measured by the hypotheti- 
cal cost of acquisition under present conditions. The 
evidence perhaps did show that naked land value is too 
low to be used as a measure of '' present cost,'' but it 
certainly did not '' demonstrate that naked land value 
... is too low to be used as a measure of the present 
value or present cost of acquisition of the carrier land."^ 

I Texas Midland Brief , pp. 904, 907. These multiples are the " weighted averages " 
of county multiples established by the two experts. See also Notes and Comments, 
p. 205. The actual work done is described by the Commission in the following terms: 

" Two men were selected who had no special knowledge of lands along this railroad, 
who were stationed upon the rear end of a passenger coach, and provided with a map 
showing the parcels as they were originally acquired. The train proceeded at its or- 
dinary rate over the length of the line. From this inspection these gentlemen \mdertook 
to state parcel by parcel the excess cost of acquisition and the damages. A computation 
showed that less than one minute could have been devoted by them to the inspection 
and determination of these excess costs and damages as to each parcel. The proposition 
that the Commission could make a report under any such method as this is too fantastic 
for serious discussion." 1 Val. Rep. 1, 169. 

The method is described in greater detail by Mr. Elmquist of the Minnesota Com- 
mission, Hearing, December, 1918, p. 96. 

On the other hand, the carriers " seriously urged that no man can appraise property 
in substantial country by riding through them in a day coach and by consulting the 
census of 1910, and the soil survey of the Department of Agriculture." Texas Midland 
Reply Brief, p. 92. It is probable that the demonstration of the extent of the actual 
examination by the government appraisers (for example, it was shown that the ex- 
amination had in part been done from a regular passenger train and that at small 
towns the train had not been stopped, on the theory that the land values would be the 
same, ibid., pp. 268, 304) led to the stricter instructions described in the Texas Midland 
opinion, pp. 167, 168. 

» Texas Midland Brief, pp. 908, 909; also Hearings, May, 1915, pp. 112, 113. 



64 

To this discussion can now be brought words ex- 
pressed by Justice Hughes in terms of a general principle : 

The railroad has long been established; to it have been linked the 
activities of agriculture, industry and trade. Communities have 
long been dependent upon its service, and their growth and develop- 
ment have been conditioned upon the facilities it has provided. The 
uses of property in the communities which it serves are to a large 
degree determined by it. The values of property along its Une 
largely depend upon its existence. It is an integral part of the com- 
munal life. The assumption of its non-existence, and at the same 
time that the values that rest upon it remain unchanged is impos- 
sible and cannot be entertained. . . . 

The Company would certainly have no ground of complaint if it 
were allowed a value for these lands equal to the fair average market 
value of similar land in the vicinity, without additions by the use of 
multipUers, or otherwise, to cover hypothetical outlays. ^ 

The comment of the Texas Midland attorneys upon 
these words is, in substance, that other language in the 
opinion upholds, if properly interpreted, the contention 
that figures produced by their method constitute admis- 
sible evidence of land value, since they conform with 
condemnation procedure, and secondly that the method 
condemned by the Supreme Court was a different 
method from that used by the Texas Midland ap- 
praisers.2 

The second contention can be briefly disposed of, since 
it represents no appeal to principle. It asserts that, 
since the base figmres to which the Minnesota multiple 
was applied was not the " naked land value," but in- 
cluded a " speculative increment " and imaginary costs 
incurred to overcome imaginary dijB&culties, the objec- 
tion voiced by Justice Hughes cannot be applied to an 
appraisal based upon " naked land value/' ^ But Jus- 
tice Hughes' language was in general terms: " The 

1 Minnesota Rate cases, 230 U. S. 352, 452, 455. See the discussion, in detail, Rail- 
road Valuation, pp. 85-93, 153-159, where the inadequacy of the " fair average market 
value " test is demonstrated. 

* Texas Midland Brief, p. 218. 

» Ibid., pp. 218-227. 



65 

conditions of ownership of the property and the amounts 
which would have to be paid in acquiring the right of 
way, supposing the raihoad to be removed, are wholly 
beyond reach of any process of rational determina- 
tion/' 1 And the fact remains too, that it is equally 
difficult to see how even the measure proposed by Jus- 
tice Hughes as a maximum — '' assuming that the rail- 
road is entitled ... to attribute to its property an 
increase in value, . . . the fair average of the normal 
market value of land in the vicinity having a similar 
character " — eliminates " conjecture. '' ^ Looking at 
the problem in terms of general reasoning (and not in 
terms of legal strategy) it seems clear that the appraisal 
introduced by the Texas Midland is, in its essential 
premises, identical with that condemned on logical 
grounds by Justice Hughes.^ 

Better authority can be secured from the Minnesota 
opinion for the first contention of the carrier attorneys : 
that portions of the opinion by " manifest implication " 
and '^necessary imphcation'' indicate that the rule for 
the ascertainment of compensation in condemnation 
cases would have been approved.^ Elsewhere the diffi- 
culty of harmonizing Justice Hughes' conclusion in this 
portion of his opinion with the cases which he cites and 
explains in his argument has been indicated.^ The 
attorneys for the Texas Midland attempt to estabUsh 
such harmony: 

The phrase " the fair average of the normal market value of the 
land in the vicinity having a similar character," and the phrase " the 
fair average market value of similar land " mean the same thing, to 

1 230 U. S. 352, 452. 

* See Railroad Valuation, pp. 90-93 for a critical analysis of this portion of Justice 
Hughes' opinion. 

» See Texas Midland, 1 Val. Rep. 1, 60. 

* Texas Midland Brief, pp. 223 and 228. The same reasoning and phraseology is 
found in Mr. Butler's argument, Hearings, May, 1915, pp. 108-115. 

6 Railroad Valuation, p. 155. 



66 

wit: the amount which the owners would be entitled to receive 
therefor, in case of acquisition by condemnation of a right of way out 
of such similar lands.^ 

The difficulty arises from the fact that Justice 
Hughes, having disposed of the carrier contention on 
one basis, went back to demonstrate that, even upon 
the hypothesis proposed by the carrier, the figures pre- 
sented were not acceptable. Making the supposition 
which he had so vigorously condemned — that the rail- 
road had been obliterated, and that its lands were in the 
hands of others — he stated the rule that the owner 
would be entitled to receive, through condemnation 
proceedings, '^ its fair market value for all its available 
uses and purposes, '^ an ^^ element to be considered" 
being ^' any pecuUar or special adaptation for railroad 
purposes." 2 Yet 'Hhe owner would not be entitled to 
demand payment of the amount which the property 
might be deemed worth to the company, or of an en- 
hanced value by virtue of the purpose for which it was 
taken; or of an increase over its fair market value, by 
reason of any added value supposed to result from its 
combination with tracts acquired from others so as to 
make it a part of a continuous railroad right of way held 
in one ownership." ^ But the carrier attorneys, resort- 

1 Brief, pp. 223, 244. At p. 226 it had been asserted: " It is clear tliat the phrase 
' its fair market value ' . , . and ' the fair average ' . . . mean the price which the 
company would legally be required to pay in condemnation proceedings." Surely this is 
to assume and not to prove a conclusion. At p. 228 less certain language is used: " The 
present cost of acquisition — ascertained according to the principles which govern in 
condemnation of private property for public use — of such right of way, or of an equiva- 
lent right of way, is certainly a relevant fact, and good evidence of present value." 

See also the extended discussion by Mr. Brantley, Hearings, January, 1917, pp. 240- 
248. Mr. Brantley's argument is substantially the same as that here outlined from the 
Texas Midland Brief. 

* Minnesota Rate cases, 230 U. S. 352, 451, citing U. S. v. Chandler-Dunbar Water 
Power Co., 229 U. S. 53; Mississippi, etc. Boom Co. v. Patterson, 98 U. S. 403; Shoe- 
maker V. U. S., 147 U. S. 282; Boston Chamber of Commerce v. Boston, 217 U. S. 189. 

Mr. Butler, Hearings, May, 1915, p. Ill, makes the point that the Hughes opinion 
is *' not written in the best of order." 

s 230 U. S. 352, 451; see Hearings, May, 1915, p. 100 (Mr. Butler). 

Justice Hughes, commenting upon the evidence presented, in relation to the basis for 
determination of land value for condemnation said: " There is no evidence before us 



67 

ing again to " implication " and " knowledge," next 
assert: 

Fair market value for all its available uses and purposes, ar- 
rived at by giving due consideration to peculiar value and special 
adaptation for railroad purposes, is known by all to be greater than 
the market value of similar adjacent lands for agricultural and other 
like purposes. Therefore, the language of the court . . . "the fair 
average of the normal market value of land in the vicinity having a 
similar character," means what the railroad company would now 
have to pay in condemnation proceedings, under the rule stated 
in this opinion, to acquire the right of way land if it were held by 
others.! 

The basis for this conclusion (which seems an obvious 
non sequitur) is the " well recognized fact " that the 
acreage value of the similar lands through which a right 
of way extends, is ^' as a rule," less than the acreage 
value of the right of way.^ This is to assume the con- 
clusion, not to prove it. 

The Conmiission approaches a recognition of the 
claim set forth in these terms by the assertion that " due 
allowance " is accorded " any special value which may 
attach by reason of the peculiar adaptability of the land 
to railroad use." ^ But since, presumably, the figures 
reported and approved were based solely upon the value 

from which the amount which would be properly allowable in such condemnation pro- 
ceedings can be ascertained." P. 452. Mr. Brantley uses this comment to justify the 
assertion that the Court approved cost of condemnation as value. Hearings, January, 
1917, p. 244. 

1 Texas Midland Brief, p. 229; Hearings, May, 1915, pp. 112, 114. Yet it is asserted, 
Texas Midland Brief, p. 231: "In value of its whole right of way, the carrier is entitled 
to have included all elements of value existing at the time of appraisal, including value 
due to shape, continuity, and profitable use. Therefore, present cost of acquisition, 
arrived at upon the principles which are applied in condemnation, may be, and fre- 
quently will be, less than present value." 

2 Ibid., p. 232. It had previously been stated that " Value, at date of acquisition, 
may be greater than cost, because of a combination of many tracts to make a continuous 
right of way held in one ownership." Ibid. But see also Hearings, May, 1915, p. 113, to 
the effect that what it costs to buy at time of purchase constitutes " value." 

3 Texas Midland, 1 Val. Rep. 1, 3, 53, 167. This holding is from Prouty, Memo- 
randum, p. 49. 



68 

of adjacent tracts, this " due allowance " is more nom- 
inal than real.i 

Quite aside from the question of the premises, stated 
or assumed, the carrier reasoning, which is based solely 
upon appeal to authority, presents an entire failure (or 
unwillingness) to recognize that at no place does Justice 
Hughes state an affirmative rule. His proposed adja- 
cent land test is premised upon an assumption which he 
neither rejected nor affirmed, while his discussion in 
terms of condemnation precedents is specffically con- 
ditioned by a premise which elsewhere is vigorously 
rejected. The truth would seem to be that Justice 
Hughes (following the example of Justice Harlan in 
Smyth V. Ames) discussed phases of the problem, and 
decided nothing except in terms of disapproval.^ An 
analysis in terms of economic principles must have re- 
sulted in the rejection of the condemnation analogy. 
But the facts did not demand such analysis. 

There is an essential difference between the results 
obtained by the proposed carrier test and those obtained 
by the Commission's method. Using the value of adja- 
cent tracts and a multiple, it will be exceptional indeed 
when the '^ value '' claimed will not exceed the amount 
originally paid by the railroad. And this probability 

1 See, moreover, the discussion of the " railway value " of land, Raiboad Valuation, 
pp. 156, 157; also Texas Midland, 1 Val. Rep. 1, 57-59. That " railway value " is not a 
clean cut concept is readily apparent: it has been defined in terms of a " value " which 
is based upon a midtiple, and in terms of adaptation for railroad purposes. It is in the 
latter sense that the phrase is used in Raibroad Valuation; in the former sense (and to 
the writer's mind, a less satisfactory sense) by the Commission in the Texas Midland 
opinion (p. 57). The phrase is used in both meanings in the Minnesota Rate cases, 
230 U. S. 352, 451-455. 

' Railroad Valuation, p. 17. 

In the Winston-Salem Southbound case where the tentative valuation based " the 
present value of lands upon the normal fair value of similar lands in the vicinity, ascer- 
tained in the manner employed and stated in the Texas Midland case," the Bureau and 
the carrier agreed on the present value, and the carrier's protest was waived, tho this 
waiver did not extend to the claims as to the ascertainment of reproduction cost or pres- 
ent cost of acquisition. 



69 

increases with the passage of years. Even with the 
Commission's method only the most recent projects 
may normally be expected to show a '^ present value '^ 
below actual cost. The increase in the value of both 
urban and rural lands has been such that only where a 
carrier has been forced to buy into an already valuable 
area, and to pay a price based, amongst other things, 
upon the presence or proximity of another railroad, has 
the cost exceeded what the Commission reports as '^ pres- 
ent value." But for these recent projects, and for some 
portions of even the older projects, it can be shown that 
the amounts reported as " present value " are actually 
less than was paid by the carrier. The notable illustra- 
tions occur where terminals have been bought in cities, 
as when the A., B. & A. secured the lands needed in 
Birmingham and Atlanta; ^ but even the Texas Midland 
could show areas which had cost more than the Com- 
mission's " present value." ^ To meet this situation 
Mr. Prouty proposed another concept: "reasonable 
value," original cost being " stated as present value, 
not because original cost is present value, but because 
under the circiunstances it would be the best evidence 
of such reasonable value " — provided " the value of 
these lands had not dechned since the date of their ac- 
quisition, . . . they were acquired with reasonable 
prudence, and ... no unusual or abnormal condition 
appeared." ^ The Commission did not follow this 

1 Thus the Birmingham terminals, costing the road $1,300,000 were " valued " at 
$900,000. A., B. & A. Brief, pp. 589, 730; Hearings, March, 1917, p. 668. "Specific 
examples " to show instances where cost exceeded " present value " are cited in the 
A., B. & A. Protest, p. 47; cost of $39,992, present value of $3,843; $40,658, $20,775; 
$13,350, $3,936. See also Kansas City Southern Protest, p. 46. 

* Texas Midland Brief, p. 881, a table showing " numerous instances, where, despite 
the great increase in land values during recent years, the * present value ' ... is less 
than the carrier paid." P. 879. 

» Prouty, Memorandum, p. 55. See Hearings, December, 1917, p. 164. Mr. Prouty'a 
reference is here doubtless to the Minnesota Rate cases: 

" It is clear that in ascertaining the present value we are not limited to the considera- 
tion of the amount of the actual investment. If that has been reckless or improvident, 



70 

reconunendation of Mr. Prouty, which is, after all, an 
attempt to introduce equitable considerations in the 
private interest.^ Perhaps it was enough that, in the 
face of the instances cited by the carrier, a present value 
of $254,479.98 was reported for lands which had cost 
$67,493.44, of which only $22,884.69 had actually been 
contributed by the carrier, lands valued at $44,608.75 
having been donated.^ Taking the railroad site as a 
whole, the method of measurement adopted showed an 
increase in the value of lands which exceeded any extra 
costs at the time of original acquisition. 

But is not cost, rather than '' value '^ based upon 
hypothesis, the really important figure ? The railroad 
is a highly specialized case of " capital sunk in the soil.'' 
Only a small part of the railroad plant can be devoted to 
another use, or to the same use in another place. The 

losses may be sustained which the community does not underwrite. As the company 
may not be protected in its actual investment, if the value of its property be plainly less, 
so the making of a just return for the use of the property involves the recognition of 
its fair value if it be more than its cost. The property is held in private ownership and 
it is that property and not the original cost of it, of which the owner may not be de- 
prived, without due process of law." 230 U. S. 352, 454. See discussion, Railroad 
Valuation, p. 124 and following, and especially pp. 128, 129. 

1 The same difficulty caused Commissioner Daniels to write as follows in his Kansas 
City Southern dissent: 

" Evidence before us shows clearly that .where a raUway is first projected through a 
new region, the land is often acquired at a nominal cost, whereas when a carrier is well 
established and a region is fairly populous, the costs to the carrier of the later-acquired 
lands whether through purchase or condemnation are likely to exceed the normal value 
of lands adjacent. 

"I raise these queries as to the method employed to ascertain land values in order to 
indicate my fear that a rigid formula may be applied where a more rational method 
would modify the formula where justifying circumstances exist. A chance dictum may 
easily harden into a formula, and a formula into a fetish, if the matter is not lifted into 
a plane of rational procedure. It was in the Minnesota Rate cases that it is said, p. 355: 
' There is no formula for the ascertaimnent of the fair value of property used for the 
convenience of the pubhc, but there must be a reasonable judgment, having its basis in 
a proper consideration of aU relevant facts.' 

" In what is said above in criticism of what appears to me an unduly inflexible 
method of estimating land values, I am not to be imderstood as challenging the pro- 
priety of the Coramission's specific land estimates in the present case and still less as 
subscribing to the exaggerated figures sought by the carrier for its Kansas City lands. 
But I am anxious to reserve scope for ' a reasonable judgment having its basis in a 
proper consideration of aU relevant facts.' " 1 Val. Rep. 223, 269. 

2 Texas Midland, 1 Val. Rep. 1, 77. 



71 

railroad site is withdrawn from actual or potential agri- 
cultural, residence or business use. A considerable 
fixed investment has been made once for all in grading 
a suitable roadbed, and providing the necessary per- 
manent structures. Once this investment has been 
made, the roadbed and site are substantially identified; 
and whether the investment in the long run shall prove 
warranted depends, not on the cost of producing the 
structiu-e, but upon demand: the volimae of traffic and 
the level of rates maintained. The return is a ^' quasi- 
rent." ^ Once the net earnings extend beyond the point 
which furnished the inducement to the original investors 
an element of ^^ unearned increment " appears in earn- 
ings, comparable to the " unearned increment '^ accru- 
ing in the rent of sites devoted to other than railroad 
purposes. 2 But this " imeamed increment " can only 
be measured in terms of cost.^ 

The difficulty with most of the reasoning upon this 
subject is that an increase in the value of land is as- 
simied to be " natural; " the relationship between the 
unearned increment in the rent of lands, and the im- 
eamed increment in land value which is the result and 
not a cause of the unearned increment in earnings, is not 
understood. Since the valuation test is a test proposed 
to measure earnings, attempt has been made to secure 
a basis independent of earnings. So, assuming that the 
railroad is entitled to the unearned increment — which 

1 See Marshall, Principles of Economics, pp. 74, 412, 425, 426. 

* See the discussion in Railroad Valuation, pp. 201-205; also A., B. & A. Brief, p. 
468. At a meeting of the Railway Real Estate Association, Mr. James P. Nelson, of the 
Chesapeake & Ohio summarized the position held by railroad land in the following 
terms: 

" Our right of way is not for sale as land at any price unless we abandon the use of the 
right of way and then at once it may become utteriy valueless. We have destroyed its 
value for every other piupose, except as railroad purpose, that purpose gone, the value 
has gone. ... If we cease to use the land as right of way, then, unless it has fitness for 
some other purpose, it has lost the breath of life." Railway Age Gazette, vol. 61, p. 702. 

> Railroad Valuation, pp. 124-131. 



72 

is really the underljdng problem ^ — it has been pro- 
posed to measure the value of the railroad site in terms 
of the value of lands devoted to dissimilar use, and in 
truth a value dependent upon the presence of the rail- 
road. There is no essential difference (except in degree) 
between the Commission's ^^ adjacent land '^ test, and 
the carrier's " adjacent land and multiple " test in this 
respect. Both are unsound.^ 



V. Cost 

The Valuation Act calls for the ascertainment and 
report in detail of the " original cost to date " of 
each piece of property. This requirement the Com- 
mission has interpreted as demanding the report of a 
fact as contrasted with an estimate.^ The properties 
have been " actually produced in the past, and their 
production has cost a given amount of money." Pro- 
vided the records suffice, original cost, '^ a fact of 
prime importance," can be exactly known, and it 
is in the exact sense that the words are interpreted 
by the Commission.^ 

1 Railroad Valuation, pp. 204, 205. 
Mr. LaFollette said in the Senate: 

"The primary purpose in establishing the values separately I shall state very 
frankly. It is to put into the possession of the Commission and upon record the data 
which wiU enable us ultimately to try out the question and determine the right of the 
railroads to capitalize the unearned increment." 49 Congressional Record, 3800. 

2 Railroad Valuation, pp. 90-93, 124-131; see discvission by Mr. Butler, Hearings, 
May, 1915, p. 107; by Mr. Hulme, p. 122; also Hearings, March, 1917, p. 566, where 
the presence of a congested colored district is supposed to add " value" to the yards of 
the Kansas City Southern at Port Arthur. 

' " The cost of reproduction new is of necessity an estimate, for the property never 
will be reproduced in fact and the exact expense of reproducing it cannot, therefore, be 
known. Depreciation is necessarily an estimate, for there is no way in which the exact 
amount of deterioration can be known." Texas Midland, 1 Val. Rep. 1, 176. 

* Ibid. Mr. Prouty has said: 

•■ Possibly I ought to say a word on the subject of original cost. The States say that 
there is no disposition upon the part of the Bureau of Valuation to show the original 
cost. I desire to state, at the outset, that that impression is absolutely erroneous. The 



73 

Search has been made for the best evidence of cost. 
The usual sources of information are the books and files 
of the carrier, but where these records are " missing or 
deficient with respect to the expenditures for property '^ 
resort is had to the records of the contractors, of reor- 
ganization committees and syndicates, and of courts 
and commissions. Where cost cannot be determined 
" within reasonable Hmits of accm-acy, from evidence 
which carries with it a fair degree of certitude '^ (i. e., 
" exactly '') the Commission reports, not a figure of 
estimate, but a statement of the impossibihty of making 
a report of cost.^ 

The detail of the report is entirely governed by the 
character of the records, altho, in its interpretation of 
the language of the act, the Commission has held that 
the phrase " each piece of property " is to be given " a 
reasonable and sensible construction.'' While the pri- 
mary account has accordingly been selected as the basis 
for the report (as " ordinarily . . . sufficient for every 
practical purpose ") it has, in some instances, been pos- 
sible to distribute the costs to the structural units. The 
information is generally given by valuation sections, but 
if the costs can be given only for the line as a whole, the 
latter procedure is followed; and, where only fragmen- 
tary data are available, such as land and equipment 
costs, reports covering such portions of the plant are 
made. 2 

The inadequacy of railroad records makes difficult 
distribution even by primary accoimts. Until 1907 ac- 
counts were not uniformly kept by different railroads, 

Bureau of Valuation, speaking for Mr. Staples, Mr. Farrell, and myself, attach more 
importance to original cost when original cost can be known than we do to any other 
thing which can be known in this valuation. But, gentlemen, we want to know that it ia 
original cost. Now original cost is a fact; it is not a guess." Hearings, December, 
1917, p. 142. 

1 Texas Midland, 1 Val. Rep. 1, 177. 

« Ibid., pp. 178, 179; Kansas City Southern, 1 Val. Rep. 223, 229-238. 



74 

nor even by the same railroad over a period of years. 
Additions and retirements, changes and betterments, 
have been made without affecting the property accounts. 
During adverse years maintenance has been deferred; 
during prosperous years improvements have been 
charged to operating expense. Even for equipment it 
is only " where the additions and changes have not been 
extensive '' that " original cost as a rule can be shown 
with exactness/' And the showing of original cost for 
the road accounts is "extremely difl&cult" because in 
the face of continual changes involving additions and 
retirements, the same general structure has been main- 
tained.^ When the Commission's accountants sought, 
by examining every voucher of the Texas Midland, to 
reconstruct the accounts " upon a proper basis," the 
task was found impossible of precise accompUshment. 
Accordingly, the tentative valuation reported that 
while " it was possible to identify the equipment now in 
existence and show the cost of that, and also to show the 
original cost of lands with reasonable certainty, ... a 
statement of the original cost of particular structures, 
or by primary accoimts, or even of the property as a 
whole, would be entirely misleading." ^ Such report 
has been possible for the Winston-Salem Southbound, 
which was built as a complete new project after 1907.^ 
Even for the Winston-Salem Southbound it is not 
asserted that the amounts reported " in every instance 
represent the exact cost of property units now in place." 

1 Texas Midland, 1 Val. Rep. 1, 179; see the discussion, Railroad Valuation, pp. 114, 
115, 121, 171-173, and the references there cited; also Texas Midland Brief, pp. 306- 
315, and cases cited. 

* Tentative Valuation, Texas Midland, p. 11. 

The accountants, however, were not able to assign the greater part of the improve- 
ments " which must have been made to this equipment, a large part of which was pur- 
chased prior to 1898." Ibid., p. 12. 

See also Railroad Valuation, pp. 136-140, and especially the quotations there givea 
from Mr. Prouty's address before the 1914 meeting of the Nat'l Ass'n Ry. Com'rs. 

« Tentative Valuation, pp. 8, 13. 



75 

But, with the quaUfication that " doubtless some re- 
newals have been made/' the tentative valuation states 
that the original cost has been distributed to primary 
accounts, and has been allocated to localities or units. ^ 
The qualification is, however, significant, and especially 
significant for the older properties. The rules of the 
Commission with respect to certain accounts are based 
upon the concept of maintenance in terms of operating 
efficiency, and not of maintenance in terms of dollars of 
investment. Accordingly no account is taken of any dif- 
ference between the cost of the new unit, and the 
original cost of the unit retired; an important considera- 
tion in a period of advancing prices; and especially 
important for those units of plant subject to frequent 
replacement : 

Consider the tie as an illustration. Let it be assumed that the tie 
now in place is exactly similar in every respect to the tie which was 
originally installed 25 years ago. That tie cost 50 cents; the present 
tie cost $1.00; nevertheless, the original cost of the present tie as 
carried upon the books of the carrier and in its investment account 
is 50 cents, which is reported as the original cost. The cost of plac- 
ing the tie is carried in Account 12, tracklaying and surfacing, which 
is entirely a labor account. Evidently, if the cost of labor has in- 
creased, the expense of placing the present tie exceeds the expense of 
placing the original tie, but this difference in expense is not reflected 
in Account 12, and it does not therefore appear in our report of 
original cost. Other of the primary accounts are affected in the 
same way to a greater or less extent.^ 

The question thus resolves itself into the question of 
whether we are now interested in what the existing plant 

1 Tentative Valuation, p. 13. 

* Texas Midland, 1 Val. Rep. 1, 178. This paragraph would seem to be a reflection 
of the discussion, Hearings, March, 1917, p. 380. At p. 149 it is stated: 

" The accounting rules of the Commission do not permit a carrier to include in the 
cost of a betterment or addition to its property anything on account of engineering serv- 
ice rendered by the operating engineers of the carrier. It usually happens that railroad 
systems of considerable size employ engineers of ability as a part of their regular operat- 
ing force, and these engineers exercise a certain amount of supervision over additions 
and betterments to the property. To an extent, therefore, engineering is not included 
in the cost of these subsequent improvements and does not appear in the total of 
Account No. 1." See discussion by Mr. Brantley, Hearings, May, 1915, pp. 73-76. 



76 

cost, or what the original plant cost five, ten, fifty years 
ago. Which constitutes original cost to date, which 
constitutes investment ? 

Fundamental considerations are raised in these terms. 
The Commission's accoimtants, finding it impossible to 

allocate costs to units of plants, have shown a '' kind of 
original cost '' by seeking to determine the source of the 
funds spent for plant, when units of plant have been 
added otherwise than as replacements charged to operat- 
ing expenses. " WTien the proper retirements have been 
made the result is the original cost of the property in 
existence, assuming those retirements to have been all 
identified and the original cost properly determined." ^ 
The difference between any amounts charged to operat- 
ing expense because of a more expensive replacement in 
kind (a SI. 00 tie instead of a 50 cent one) and the orig- 
inal cost of the original unit (the 50 cent tie) is assumed 
not to constitute investment, since it has been charged 
to operating expenses.^ 

In substance this is a proposal to accept the carrier 
accounts for operating expenses at the same time that 

1 Texas Midland, 1 Val. Rep. 1, 179. The amount reported as the " maxLmum 
cost " of the Texas Midland, determined upon this basis, was $2,892,360.94. Ibid., pp. 
9-11, 98-100. " It is beheved that this figure is of great value, but it must not he 
understood that it precisely represents original cost, for it does not," p. 190. See also 
Hearings, May, 1915, p. 142; December, 1917, p. 169. For the Kansas City Southern 
it was agreed between the Bureau and the carrier that the total " investment cost " of 
the railroad system, excluding an affiliated tank car line, was $46,978,042. 1 Val. Rep. 
223, 229. 

* The following is quoted from the Brief of Messrs. Benton and Farrell supporting 
the Kansas City Southern tentative valuation: 

" Such increase in the cost of ties used for renewal as has been paid out of operating 
expense, and the same cannot be included in a statement of original cost without making 
such cost, as reported, reflect something quite different from the investment in proper- 
ties made by the owners out of capital advanced by them. It is not to be supposed that 
Congress intended that the Commission shoiild include as original cost to the carrier 
anjthing which has been properly paid for as operating expense," p. 26. It had pre- 
viously been admitted that an increase in the cost of ties had occurred, and that the 
increase had not found its way into the investment accoimt of the carrier. But it was 
denied that this cost should be included in original cost. Ibid. 

See Kansas City Southern, 1 VaL Rep. 223, 237, 238. 



77 

the property accounts are rejected as worthless, altho 
the inadequacy of accounting theory and practice would 
seem to apply equally to both. Because it could not be 
determined from the accoimts whether '' Box Car No. 
1894 (galvanized sides and roof) . . . had been built at 
the company's shops and the cost thereof charged to 
operating expenses, or whether it had been donated,'' 
no original cost for this unit of plant was reported. ^ 
This is perhaps an extreme illustration, but it serves to 
bring out clearly the essential point of principle: it is 
possible for actual investment to be made even tho the 
cost of the unit of plant be charged to operating expenses. 
Whether the new unit of plant represents a net increase 
in investment depends upon other considerations: 
maintenance, depreciation, etc.^ But when analyzed in 
terms of investment (money spent in the creation of 
plant) all maintenance is seen as a creation of capital 
goods, altho the accoimtant conceives of it only as ex- 
pense.3 It is not a reductio ad ahsurdum of the deprecia- 
tion appraisal that the " condition per cent " of a 
locomotive is greater after shopping than before. The 
newly shopped locomotive represents more stored up 
labor, measured by dollars of labor cost — greater 
investment.^ 

1 Texas Midland, 1 Val. Rep. 1, 100. It was further stated that no record of the cost 
of the car could be found in the accounts. 

' See the discussion, Railroad Valuation, pp. 108-124 and especially pp. 110-114, 
121. 

' " Take the case of the locomotive. When it has been shopped, the cost of the new 
wheel, or piston rod, or driving axle constitutes the existing iavestment, not the cost of 
the original part which has become worn out and useless for productive purposes. . . . 
The accountant would conceive of the cost of such repairs as maintenance, therefore, 
solely as operating expenses. Business practice does not coincide with the refinement of 
economic theory which is important for the course of the present reasoning." Ibid., 
p. 111. And see the diagrams in F. A. Delano, " The Application of a Depreciation 
Charge in Railway Accounting," Journal of Political Economy, vol. xvi, p. 362, which 
illustrate the contention here made; and testimony of Mr. Wells of the Texas Midland 
in response to the question as to what was left of an original engine: " There was not 
very much of the original locomotive left except the outside shell of the boiler, the 
frame and the cylinders." Hearings, March, 1917, p. 864. 

* Condition Per Cent, pp. 34, 40. 



78 

Within uncertain limits, set by a variable standard 
as to what constitutes the most economical operating 
condition (or from the other angle, what constitutes 
^' deferred maintenance ") the carrier has very real con- 
trol over the disposition of its income. The pubHc has 
not paid the operating expenses of the railroad in any 
different sense than it has paid the operating expenses 
of any other private business. The public has paid a 
price for a service, and out of the total income, the dis- 
position of which has been largely in the hands of the 
directors, appropriations have been made for dividends, 
for maintenance, for extensions, etc. Once the income 
accrued to the private company, its distribution, except 
as affected by safety regulations, etc., has been de- 
termined by the private interest, and under private 
control. Heavy appropriations for maintenance, re- 
placements and renewals (even for additional structures) 
have been made out of earnings, but the directors have 
had the choice of making such reinvestment of earn- 
ings, or of distributing the earnings, including even the 
amounts properly representing the wearing out of equip- 
ment and plant.i When dividends have been suspended, 
or interest repudiated, in order to put money back into 
the property, can it be said that the plant bought 
from earnings did not cost the owners anything, because 
charged as operating expense upon the books ? ^ 

Any legitimate claim for " appreciation " is based 
upon an analysis of maintenance as investment, altho 
the concept, as discussed by the carrier counsel, is by no 
means clean cut.^ Too frequently the evidence (expert 

1 For illustrations of what happens when the directors fail to invest earnings in 
plant, see the discussion of the Boston & Maine and the Rock Island Co., in Ripley, 
*' Railroads, Finance, and Organization," pp. 236, 237; and the chapters on the Atchi- 
son and the Baltimore & Ohio, in Daggett, " Railroad Reorganization." 

* See quotation from Mr. Prouty, below, p. 268. 

» Railroad Valuation, pp. 110, 111; Texas Midland, 1 Val. Rep. 1, 65-68; 130-135. 



79 

testimony) has sought to show that the old roadbed is 
more '^ valuable " than the new roadbed, because main- 
tenance expenses are less, or a purchaser would be will- 
ing to pay more, etc.^ But the essential point is that 
" a railroad is not a finished product when the construc- 
tion forces have put its parts together and turned it over 
to the operating department/' ^ There is still much 
work to be done '4n resurfacing, in opening up clogged 
waterways, and in bringing about an improved condi- 
tion or roadbed, right of way and station groimds." * 
And to the extent that this work represents a net addi- 
tion to investment it may be said that an '' apprecia- 
tion " has occurred which is quite independent of 
earnings or ^' value," regardless of the method of han- 
dUng the extraordinary expenses upon the books. When 
the Commission falls back on its accounting categories, 
the real imderlying problem is passed over. That under 
the prescribed rules of accounting the carrier cannot 
carry any part of this expense into its investment ac- 

1 The following excerpts from the testimony are typical: 

Mr. Brantley: " Mr. Brumley, as between a new roadbed; that is, one that is first 
completed, and an old roadbed, or one that has been in operation quite a number of 
years, which is the more valuable ? " 

Mr Brumley: " The old roadbed, which has gone through the process of seasoning, 
solidification, and adaptation." Hearings, March, 1917, p. 149; compare testimony of 
Mr. C. S. Churchill, of the Norfolk & Western, p. 164; testimony of Mr. H. C. Phillips, 
Hearings, May, 1915, pp. 59-61. 

* Mr. Brantley (ibid., p. 56) continued in terms which indicate the imcertainty of the 
concept: 

" In addition to such further work and quantities there is an increased value that 
comes to the property by reason of solidification, adaptation, and adjustment which is 
due primarily to time and use. This additional value is quite pronounced and is uni- 
versally recognized to exist, and is the appreciation for which, as 1 understand it, we are 
now asking an allowance be made." 

« Carrier Valuation Brief of 1915, p. 157. 

In the Kansas City Southern Brief, it is said: 

" It appears from the testimony of Mr. Johnson, Mr. McCarty and Mr. Rust, that 
section men ordinarily perform work properly classed as construction work, such aa 
widening cuts and fills, sodding banks, cleaning out ditches, and depositing the material 
in embankments, constructing rip rap and other bank protection work. Approximately 
8 to 10 per cent of their time is employed in work of this character. This work is essen- 
tially construction work, and its cost is a proper capital charge." P. 269. The Texas 
Midland Brief does not discuss appreciation because the " principles and authorities " 
are fully discussed in the 1915 Brief. 



80 

count proves notliiiig conclusively, except that, when 
tested by a refinement of economic theory, the account- 
ing rules are inadequate.^ Thus there is no " trans- 
mutation of past operating expenses into property." ^ 
The property (plant) already exists as part of the ma- 
chinery of production. Nor from the point of view of 
principle is it important that an extremely difficult task 
of measurement is proposed.^ It is perhaps signifi- 
cant that the Commission in the Winston-Salem South- 
bound opinion falls back on the cost of reproduction 
hypothesis: '' Appreciation cannot be produced merely 
by the expenditure of money and therefore cannot be 
reproduced new. We have already pointed out that the 
valuation amendment contemplates the ascertainment 
of cost of reproduction new, and not the cost of reproduc- 
tion in the present condition." ^ The cost of apprecia- 
tion has not been recognized as possibly constituting a 
part of the real original cost. And this is the fimda- 
mental error in the Commission reasoning.^ 

1 This conclusion is based upon a premise -which the resort to the authority of the 
accounting rules indicates that the Commission admits is valid: namely that actual 
"betterments" are added to existing plant xinits through maintenance work. See 
Notes and Comments, p. 67. 

The following is quoted from the March, 1917, Hearings: 

Director Prouty: " I do not think we make any question — I certainly do not — 
that a seasoned roadbed is worth more than a green roadbed. . . . My claim is . . . 
the seasoning does not cost anything, because it has all been paid for as operating ex- 
penses, additions and betterments." P. 165. This conforms with Mr. Maltbie's state- 
ment. Hearings, May, 1915, p. 64; see also Mr. Farrell's Brief in the Texas Midland 
case, p. 35; and in the Kansas City Southern case, p. 14; also Prouty, Memorandum 
on Final Value, p. 5, to the same effect. 

» Mr. Aitchison, Brief for the Nat'l Ass'n Ry. Com'rs, p. 94. 

* See discussion, Texas Midland, 1 VaL Rep. 1, 65, 130, the unsatisfactory nature of 
which indicates the difficulty of the task of measurement; and Hearings, March, 1917, 
pp. 80, 102, 127, and 164. 

* 1 Val. Rep. 187, 195; Mr. Prouty expressed the same idea at the March, 1917, 
Hearings, p. 51, and the argument appears in Benton and FarreU, Kansas City Southern 
Brief, p. 16. 

* But the following from the majority opinion in the Kansas City Southern case 
indicates a less positive attitude than that shown in the Texas Midland and Winston- 
Ssdem Southbound opinions: 

" It is testified that between 8 and 10 per cent of the time of section men is devoted 
to work the cost of which represents a proper charge to the capital account. Ulustra- 



81 

The original cost appraisal made by the Kansas City 
Southern represents an engineering attempt to supply 
the data which rewriting of the accounts has failed to 
secure, because of the inadequacy of the records, or the 
insufficiency of the accoimting rules. The proposal, by 
no means a new one, is that an engineering investiga- 
tion, parallel in its scope with the reproduction field 
work, shall be translated into terms of dollars on the 
basis of the actual cost of the imits in place, regardless 
of the source of the funds. ^ The result secured by such 
investigation (assuming 100 per cent accmracy) will be 
that sum which measures the investment new (repre- 
sented by the physical plant) in terms of dollars. In a 
very real sense it measures original cost to date; in fact, 
it is difiicult to see that any other figure can represent 
such cost, except on the basis of far-fetched definition.^ 
But the Commission, in its Kansas City Southern 
opinion ruled otherwise.^ 

The contention of the carrier has not been answered 
in terms of principle. " The Commission has taken 
the position that if the facts as to original cost can- 
not be ascertained from the records, an estimate may 
not be substituted.'^ ^ Cost, it will be remembered, is a 

tions of such work are widening cuts and fills, sodding banks, cleaning out ditches and 
depositing material in embankments. . . . We will not add unknown charges to the 
amount stated as investment in the property and the claim of the carrier is not sus- 
tained." 1 Val. Rep. 223, 252. This establishes a test of accurary, not a test of prin- 
ciple. 

And compare Commissioner Daniels' critical analysis of the unsatisfactory treat- 
ment of the appreciation problem in the three cases in his dissenting opinion. Ibid., 
pp. 266-269. He says: " The fact that the carriers have not shown us how to measure 
it is no excuse for om- declining to measure or estimate it, if it exists, and it ought to be 
included and reported." P. 269. 

1 Testimony of Mr. R. J. McCarty, Vice President, Kansas City Southern Railway, 
Hearings, March, 1917, pp. 357-395; Protest, Kansas City Southern, p. 11; Brief, pp. 
243-279. See Brief of Glenn Plumb for the Railway Brotherhoods, pp. 67-73. 

» RaUroad Valuation, pp. 110, 135, 136. See Mr. Prouty's discussion. Hearings, 
December, 1917, pp. 142-144. 

3 Kansas City Southern, 1 Val. Rep. 223, 229. 

♦ Benton and Farrell, Kansas City Southern Brief, p. 14; see discussion in similar 
tone by Mr. Prouty, Hearings, December, 1917, pp. 143, 144. 



82 

fact.i Mr. Prouty answered Commissioner Anderson's 
supposition that ^' it would be at least as easy to make 
an accurate estimate of the original production costs '^ 
by a denial: 

Well it is not as easy, because we do not know the prices. We 
cannot get the prices as accurately. We cannot tell in a great many 
instances when the property was produced, and it is not as easy. 
Take property which has been developed from a single track into a 
double track, or from narrow gauge into broad gauge, or take the 
Kansas City Southern, which has been developed from a single track 
into a perfected single track. You cannot tell when those things 
were done, and I do not think you can tell what it actually cost to do 
it; but I have repeatedly said to the Commission that if you want 
that kind of an inventory, we can make a pretty good stab at it. We 
can tell when a bridge was built; we can generally tell when a culvert 
was put in, or when a rail was bought, or when a tie was bought, on 
the average, with considerable accuracy. So, if you want that kind 
of an inventory, we can give it to you, Mr. Commissioner, but it will 
not be as reUable as the reproduction inventory. It will be more of 
an estimate than that, and it will not be good for anything, in my 
judgment, when you get it.^ 

But, after all, the issue is not a question of ease; nor 
even a question of relative accuracy. It is one of prin- 
ciple. Even on the basis of accuracy, the skeptic may be 
pardoned: for cost of reproduction is, by definition, 
purely hypothesis. And certainly the ComLmission's 
" investment cost '^ cannot be said to bear any neces- 
sary relation to the cost of the present plant. 

While an appraisal based on the cost of the imits in 
place measures original cost to date, it does not measi^e 
unimpaired investment: the amount of original cost not 
used up in producing past service. An appraisal of 
accrued depreciation is still necessary in order to meas- 
ure the amount of that cost which has been so used up; 
or, in accounting terms, to measmre the depreciation 
reserve which would appear upon the books, did the 

» Texas Midland, 1 Val. Rep. 1, 176. 

» Hearings, December, 1917, p. 167. See also Mr. Prouty's argument. Hearings^ 
January, 1920; and his Memorandum on Final Value, p. 12. 



83 

accounts show the actual economic (and business) facts. 
That the Valuation Act calls for no analysis in these 
terms, but only a vague cost to date, is further evidence 
of the inadequacy of that legislation.^ 

VI. Intangibles 

The first series of Tentative Valuations found '* no 
other values or elements of value ... to exisf : ^ a 
conclusion which the Commission, in the Texas Mid- 
land case, declared constituted full compliance with the 
requirements of the Act.^ The Kansas City Southern 
opinion, however, modified this holding: '' No other 
values or elements of value to which specific sums can 
now be ascribed are found to exist.'' ^ In the Texas 
Midland case the carrier had insisted that the law 
obligated the Commission to find and report any ele- 
ments of value, while the Commission insisted that the 
carrier '^ name a figure which . . . should be found." ^ 
Altho the latter failed to make claim in terms of dollars, 
it asserted that the following items constituted " other 
values and elements of value " : 

(1) going concern value, 

(2) connection with other lines, 

(3) good station facilities, 

(4) gradients." 

» For discussion of the unimpaired investment concept, see Railroad Valuation, pp. 
105, 106, 108-110, 114-121, and the references there cited. 

* Tentative Valuation, Texas Midland, p. 2; Winston-Salem Southbound, p. 2; 
Elansas City Southern, p. 8. Mr. Brantley (A., B. & A. Brief, p. 410) asked that the 
finding be amended to read: " No consideration has been given to intangible values." 

» Texas Midland, 1 Val. Rep. 1, 71; see however. Protest, Texas Midland, p. 9; 
Winston-Salem Southbound, p. 6; Kjansas City Southern, p. 55; Texas, New Orleans, 
and Mexico, p. 8. But no other values or elements of value were foimd for the Winston- 
Salem Southbound, 1 Val. Rep. 187, 206. 

* Kansas City Southern, 1 Val. Rep. 223, 292. 

6 1 Val. Rep. 1, 69; compare Notes and Comments, p. 220: 

" As to other values and elements of value, the tentative valuation fails to comply 
with the law. ... It is plain that the law requires these " intangibles " to be ascer- 
tained and reported ... it is as much the duty of the Commission to investigate and 
ascertain the facts as it is to inventory the physical property in detail and show the 
several costs thereof as required." See also A., B. & A. Brief, pp. 388-409. 

« 1 Val. Rep. 1,69. 



84 

The Texas Midland developed no evidence on these 
points, but to support the general contention, distin- 
guished railroad men testified at length for the A., B. & 
A. and the Kansas City Southern.^ The object was 
rather the establishment of the existence of such ele- 
ments of value than their appraisal in dollars. The task 
of appraisal was left to the Commission as a part of the 
task imposed by the terms of the Act. '' There ought to 
be some way," said Mr. Lamb.^ And Commissioner 
Daniels has accepted the reasoning of the carriers, as is 
indicated by the following excerpt from his dissent in 
the Kansas City Southern case: 

I am not satisfied with the negative finding proposed in this report 
to the effect that no other values or elements of value are found to 
exist to which a definite figure can be attached unless this finding be 
understood merely in the sense of a progress report. . . . 

I do not concur in the intimation in previous valuation reports 
that the carrier's failure to show us the method to employ in estimat- 
ing other values or elements of value or the carrier's failure to 
demonstrate to us the appropriate figure to be attached . . . con- 
stitutes the fulfillment of our afl&rmative duty in the premises. . . . 
The search for and the appraisal and reporting of these items for 
intangibles, if they exist, is an obligation imposed on the Commis- 
sion." 5 

The franchise, as such, and franchise value have oc- 
cupied a relatively small place in the discussion of intan- 
gibles. The Alabama Rate cases have been cited,^ and 

> Hearings, March, 1917, pp. 18-47 (Mr. E. T. Lamb, President, A., B. & A.); pp. 
49-63 (Mr. E. M. Durham, Jr., Valuation Engineer, A., B. & A.); pp. 307-309, 325- 
374 (Mr. J. F. Holden, Vice President, Traffic, Kansas City Southern); pp. 357-395 
(Mr. R. J. McCarty, Vice President, Accoimts, Kansas City Southern); pp. 565-580 
(Mr. L. F. Loree, Chairman, Kansas City Southern). 

Mr. Butler stated (ibid., p. 873): " We are not going to develop any theories or any 
opinions as to what figure the Commission should set down separately for other 
values and elements of value." Compare Mr. S. W. Moore of the Kansas City Southern 
to the same effect, pp. 339, 346. 

* Ibid., p. 36; and see the excerpt from Mr. Butler's argument, 1 Val. Rep. 1, 69. 
The promise contained in the Carrier Valuation Brief of 1915 has not been fulfilled: 

" The method by which these other values and elements of value should be measured 
will be submitted to the Commission at some later time." P. 532. 
« 1 Val. Rep. 223, 272. 

* 196 Fed. 649, 800; 197 Fed. 954; discussed critically. Railroad Valuation, pp. 147, 
148; cited. Carrier Valuation Brief of 1915, p. 527; Texas Midland Brief, pp. 20, 98, 



85 

the fact that the A., B. & A. paid a franchise tax was put 
in evidence.^ And that is all. The emphasis has rather 
been upon " going concern value '^ in terms of that 
^' strategic " value which seeks to estabhsh as " ele- 
ments of value/' the factors which make for larger gross 
earnings, or lower operating costs, and which, therefore, 
govern net earnings. ^ 

The considerations which, it is alleged, make for this 
^' intangible value '' are 

Density of population and traffic. 

Nature and permanence of population and traffic. 

Facihties for doing business, including interchange 
facihties. 

Physical characteristics, governing operating condi- 
tions. 
Even for the Texas Midland it was urged that a " value" 
should be found because of its connections, facihties, 
and gradients.^ For the Atlanta, Birmingham and At- 
lantic and the Kansas City Southern simihar claims 
were substantiated by the testimony of the distinguished 
railroad men already cited. President Lamb indicated 
that investors would be influenced by the fact that the 

190, 312, 419; Hearings, March, 1917, p. 22; no reference to this evidence appears in 
Mr. Brantley's brief, altho it is referred to in Protest, A., B. & A., p. 8. 

1 The Kansas City Southern Protest speaks of " the value of franchises and priv- 
ileges . . . conclusively established against the carrier in the states of Missouri, Ar- 
kansas, and Texas by the assessing and taxing boards of those states." P. 67. 

* See discussion, Railroad Valuation, pp. 150-153; also Hearings, October, 1918, 
p. 3, argument of Mr. S. W. Moore, General Solicitor of the Kansas City Southern, citing 
Northern Pacific v. The State, 147 Pacific 45, in which the Supreme Court of Washing- 
ton upheld a valuation based upon " market value " for the purposes of taxation; 
Hearings, October, 1915, p. 164, argument of Mr. Sanford Robinson; and Texas Mid- 
land Brief, p. 380. 

In the Texas Midland Brief, it is said: 

" The value which is here designated as franchise value is in reality all the value in an 
assembled and established plant, doing business and earning money, over one not thus 
advanced, and not the value of the bare franchise alone." P. 418. 

» Texas Midland, 1 Val. Rep. 1, 69; Tentative Valuation, p. 15; and Hearings, 
March, 1917, pp. 866, 867, a letter from the Chief Engineer of the Texas Midland, in 
which the assertions are made. The fact that Texas taxed the Midland on the $544,000 
*' intangible value," disclosed in this letter, is referred to in Notes and Comments, p. 221. 



86 

A., B. & A. 'traverses a section of the country rapidly 
increasing in population and wealth." ^ 

More than this, the road interchanged traffic at 
twenty-eight points; it possessed the lowest grade from 
Birmingham to the seaboard, and had been increasing 
its trainload ; net earnings had grown.^ The Kansas City 
Southern officials gave parallel testimony, Mr. Holden, 
a traffic official, describing in detail the size and growth 
of the cities served, their commercial and industrial 
importance, the interchange facilities, the composition 
and growth of the traffic, and the organization and 
functioning of his department.^ The expressed piu-pose 
was " to prove that the Kansas City Southern possesses 
a voliune of traffic passing over its rails amounting to 
. . . 4,000,000 tons of freight per annum, to show how 
that has been built up, and to show what the prospects 
are of its continuing and increasing in the futm*e." ^ 
And the Elgin, Joliet and Eastern (the Chicago ^' Outer 
Belt '') has emphasized particularly '^ the density of the 
traffic over the railroad ... by reason of its favorable 
location and connection with other railroads and 
industrial plants, etc., etc.^ 

The Texas Midland, Winston-Salem and Kansas 
City Southern cases testify to the truth of the assertions 
made by the carriers : traffic connections are Hsted; the 
density of traffic is summarized; the character of the 
adjacent country is described, and its products classi- 
fied; the maximum grade and curvature is stated.® 

» Hearings, March, 1917, p. 45. The growth of the tributary territory is exhibited 
at length, pp. 20, 21, and the increase in traffic density, p. 22. 

* Testimony of Mr. Lamb, Hearings, March, 1917, pp. 19-23; summarized A.. B. & 
A. Brief, pp. 410-416; also p. 402. 

* Hearings, March, 1917, pp. 307-374, including elaborate tables and diagrams by 
way of illustration, pp. 331-337; summarized. Protest, Kansas City Southern, pp. 58- 
65. 

« Statement of Mr. S. W. Moore, Hearings, March, 1917, p. 339. 

« Protest, E., J. & E., pp. 44, 46. 

« 1 Val. Rep. 1, 72, 81; 187, 202. 208; 223, 275, 323-328. 



87 

The A., B. & A. Protest insists that the denial of the 
existence of ^^ other values/^ and a report, in the same 
document (the Tentative Valuation), of interchange 
facilities, terminals, developing traffic and favorable 
grades constitute a contradiction.^ The criticism is at 
least pertinent. What is the function of data reflecting 
the forces which make for earnings if no '^ values " are 
assigned ? The difficulty is, of coin-se, the inherent one: 
to appraise these " elements of value " in terms of dol- 
lars necessarily involves a consideration of earnings, 
when those earnings are themselves under considera- 
tion. " Unless the so-called ' Other Values and Ele- 
ments of Value ' do produce a favorable effect on the 
net earnings, they are of no value.'' ^ 

But if earnings be rejected, what of costs ? The 
measurement of intangible " value,'' or " going value " 
by an accumulation of preliminary deficits below a fair 
return has been suggested to the Conamission, which 
has, however, postponed discussion: ^' These deficits 
are not elements of value, but they are pertinent facts 
to be given consideration in a proper proceeding." ' 

* p. 9. The same claim is foiind in the Winston-Salem Southbound Protest, p. 6. 

' To this statement, put in the interrogative by Mr. Farrell, Mr. Loree answered: 
" I should say not as affecting the market value of yoixr securities, no." Heariugs, 
March, 1917, p. 580. See the discussion in detail covering the essential question of 
principle. Railroad Valuation, pp. 150-153; and the analysis by Mr. Brantley, A., B. & 
A. Brief, p. 402. 

In the Texas Midland Brief it is said: 

" There are, of course, a great many operating plants whose total value exceeds their 
physical value by only a nominal amoimt. The other values and elements of value may 
be nominal in the case of an operating plant whose past performance and present and 
future prospects do not hold out the hope of success." P. 354. 

» Texas Midland, 1 Val. Rep. 1, 71. Compare Winston-Salem Southbound, ibid., 
p. 198: 

" Whether in fixing a value for purposes imder the act to regulate commerce, we 
should increase the cost of reproduction by the amount of deficit which the carrier may 
have incurred during the early years of the enterprise, will be a proper considera- 
tion when we come to state a single simi as value of the common-carrier property for 
such purposes. That question we leave intact. As stated, in the final valuation herein 
made we have the basic facts. The record herein shows no other values or elements of 
value." The Texas Midland Brief, p. 453, recognizes " the logical difficulty in translat- 
ing losses, actual and realized, or estimated and probable, directly into terms of value. 
It ia not true that the greater such losses the greater is the value." 



88 

This conclusion (the steps by which it was reached are 
not given) is in accordance with sound reasoning. The 
Wisconsin deficit theory ^ is not valid since it purports 
to measure investment, not in terms of saving, of effort, 
of sacrifice, but by results.^ But this is not the whole 
story. For the early " starving time '' normally coin- 
cides with the period in which effort is expended (and 
funds are diverted) to the building up of permanent 
organization and external relations.^ It is even con- 
ceivable that a part of the original bookkeeping deficit 
may be due to those extraordinary maintenance charges 
representing net additions to plant investment — ap- 
preciation.^ These costs are not, however, limited to 
the carrier which shows an accumulation of operating 
deficits, or deficits below a " fair return.'^ The costs of 
building up an organization and of estabhshing relation- 
ships — which are the important elements in long-run 
cost of producing service — have been incurred equally 
by the road which has been operated profitably from the 
first. In Mr. Prouty's words, " Going concern . . . 
costs something in the case of every railroad.'' ^ But no 
usable method of appraisal has yet been suggested. 
The conjectural nature of the "valuation" of tangible 
assets has already been indicated. For an appraisal of 
"going value" this uncertainty is multiphed manifold.^ 
To be sure, the carriers have proposed a rule. Let 
" total value " be determined, and let the amount of the 

1 Which it would seem was in part responsible for the presence of the " other valuea 
and elements of value " in the Act. See Senate Report 1290, 62d Congress, 3d Session, 
pp. 94-99, 225-228, the testimony of J. R. Commons and B. H. Meyer. 

J Railroad "Valuation, pp. 166, 167. The Wisconsin Conunission is cited at length, 
Texas Midland Brief, pp. 421-438. 

» Railroad Valuation, pp. 186, 187. 

* This argument is presented in the A., B. & A. Brief, p. 323 and following. At p. 324 
Mr. Brantley said: " The matter of appreciation, or cost of development, naturally 
divides itself into two classes, the cost of developing the physical property, and the cost 
of developing the business." 

* Hearings, December, 1917, p. 162, an analysis of the fundamental economic prob- 
lem. See Railroad Valuation, p. 187. 

« Ibid., pp. 185-187. 



89 

*' physical value ^^ (whatever that may mean) be sub- 
tracted in order to fix upon the other values and ele- 
ments of value. But this is to make the intangibles a 
result, and not a cause, of " value." ^ 

VII. Final Value 

The discussion tiu'ns then to the determination of 
" value.'' What principles govern value determina- 
tion ? A general formula is offered by the carrier inter- 
ests: '' Value in rate confiscation cases is the same as in 
condemnation cases," ^ and in support of this contention 
a quantity of muddy paragraphs from court opinions is 
quoted.^ But in none of these opinions has the con- 
demnation-regulation analogy been critically analyzed; 
and, indeed, had such critical analysis been made, before 
the force of precedent rendered sufficient mere citation 
of the " rule," its logical insufficiency must have been 
readily apparent. Whatever the history of the doctrine 
which would identify regulation as pro tanto condemna- 
tion, the fact is that regulation is not pro tanto con- 
demnation, and that to consider it as such, and not to 
measure ^' value " independently of earnings, is to estop 
regulation.^ The analogy is premised upon the assump- 
tion that lower rates will reduce earnings, and to that 
extent, the value of the property,^ the difference between 
the old net earnings capitafized, and the new net earn- 
ings capitafized representing the " value " taken. From 
the nature of the case, no compensation is paid for this 

1 Kansas City Southern, 1 Val. Rep. 223, 270. 

* Notes and Comments, p. 37; compare Texas Midland Brief, pp. 19, 81, 91; Texas 
Midland Reply Brief, p. 20; Hearings, May, 1915, p. 152, Mr. Sanford Robinson, citing 
Ames V. Union Pacific, 64 Fed. 165; ibid., January, 1917, p. 308. 

5 Texas Midland Brief, pp. 81-98. 

* RaUroad Valuation, pp. 9-11, 15, 145, 146. 

s " How else justify the analogy at all ? But to test rates by the value of the prop- 
erty before the act of regxilation is made effective means the abandonment of regulation. 
And to test them by the value of the property, once the new schedules are in effect, 
means the approval of any schedule that may be established. The vicious circle is 
dearly present." Ibid., p. 11. 



90 

" value " taken or destroyed. The purpose for which 
" value " is determined in a condemnation proceedings, 
and that for which it is determined in a regulation con- 
troversy is therefore quite different. In the rate case 
value is proposed as a measure of existing earnings, not, 
of earnings destroyed; in condemnation, value is a 
measure of that which is taken, of the consideration to 
be paid for the destruction of all earnings. The assumed 
analogy is not vaUd.^ 

But the tactics of the carriers have been to ignore such 
logical analysis and to insist upon ^' what the cases say 
as to the nature and attributes of value." ^ in famiUar 
terms, " value is power in exchange . . . the amount 
in dollars which a purchaser not under compulsion to 
buy will part with to obtain the item of property, and 
which the seller not under compulsion will accept for 
it." The carrier contentions on depreciation, deferred 
maintenance, appreciation, strategic value, and going 
value are readily explained in the Hght of this definition. 
Because a railroad worn to a state of normal deprecia- 
tion will earn (gross) at least as much as a new road 
(other things being equal) it is " worth " as much. Be- 
cause the roadbed of such a railroad will cost less for 
maintenance, it is " worth " more than a new roadbed.^ 
And a purchaser, influenced by conditions governing 

1 The parallel in language used in condemnation cases and in regulation cases has 
been due to the general inadequacy of the analysis, and to the uncertainty of the con- 
cept. In the Texas Midland Brief, after reviewing the series of Supreme Court opinions 
beginning with Reagan v. Farmers' Loan & Trust Co., it is said: 

" The foregoing cases remove all question of doubt as to the legal meaning of ' fair 
value ' as that term is used in the case of Smyth v. Ames. It is ' just compensation * 
guaranteed by the constitution, the value of property taken in condemnation cases, and 
that value on which fair return must be allowed in rate cases. Every prescribing of 
rates is a taking of property, and under the constitution there must be just compen- 
sation." P. 91. See discussion of Knoxville Water Co. v. KnoxviUe, 189 U. S. 434, 
Railroad Valuation, pp. 14, 15. 

* Texas Midland Brief, p. 73. 

3 Mr. Prouty has said, " It is universally admitted that an old and seasoned road- 
bed is worth more for the transaction of business than a new one. The same traflBlc 
can be handled over it for less cost, or more traflBc for the same cost." Memorandum 
on Final Value, p. 4. 



91 

traffic density and operating costs, will pay more for the 
established property in a developing community. Net 
earnings are, therefore, the important element. The 
" physical value " is only important since by its deduc- 
tion from total value — however that value may be 
determined — the intangible value or " going value '^ 
is determined. 1 So runs the carrier argument. 

The decisions reUed upon as precedents upholding 
this contention are tax and condenmation opinions, the 
leading tax cases being the Express Company cases 
and C, C, C. & St. L. v. Backus; the leading condem- 
nation case being Monongahela Navigation Company 
V. United States. In the latter case, the Court said: 

The value of property, generally speaking, is determined by its 
productiveness — the profits which its use brings to the owner. . . . 
The commerce on the Monongahela River, as appears from the 
testimony is great. ... A precisely similar property, in a stream 
where commerce is Ught would naturally be of less value, for the 
demand for the use would be less. The value, therefore, is not deter- 
mined by the mere cost of construction, but more by what the com- 
pleted structure brings in the way of earnings to its owner .^ 

And there is the " very apt illustration '' in the Backus 
case: 3 

Suppose there to be two bridges over the Ohio, the cost of the 
construction of each being the same, one between Cincinnati and 

^ After devoting over a hundred pages to an exhibition of precedents, the Tescas 
Midland Brief falls back upon this subtraction program: 

" The value of the property is to be determined as a whole (value is single in fact and 
substance tho capable of analysis in thought and discussion) and the other values and 
elements of value may be found by subtracting the amount attributable to the physical 
elements, the so-caUed ' physical value ' from the value of the whole." P. 475. 

The same " rule " is stated by Mr. Butler, Hearings, December, 1917, p. 49; com- 
pare Re Marin Municipal Water District, P. U. R. 1915-c, 433 (Cal.), a condemnation 
case quoted at p. 375, and Appleton Water Works Co. v. R. R. Commission of Wiscon- 
sin, 154 Wis. 121, a condemnation case, quoted, pp. 434-436. 

The Kansas City Southern Reply Brief, p. 10, cites a series of cases (L. & N. Ry. Co. 
v. Greene, 244 U. S. 522; Greene v. L. & I. Ry. Co., p. 499; Illinois Central v. Greene, 
p. 555) involving a Kentucky statute which determined " value " by the capitalization 
of earnings, the assessed value of the tangible property being deducted to determine the 
value of the intangible property, 

» 148 U. S. 312, quoted at length, Kansas City Southern Brief, pp. 110-112. 

» Ibid., p 61. 



92 

Newport, and another twenty miles below, and where there is 
nothing but a small village on either shore. The value of the one 
will, manifestly, be greater than that of the other, and that excess of 
value will spring solely from the larger use of the one than of the 
other.^ 

Railroad valuation based upon earnings represents 
then merely the application of ''the methods and proc- 
esses ordinarily employed in every-day affairs in arriv- 
ing at the value of any industry or any commercial 
enterprise.'^ ^ ^he claim had been asserted in general 
terms by Mr. Brantley, but not emphasized. Its elab- 
oration was the task of the Kansas City Southern 
counsel. Did not Justice Harlan in Smyth v. Ames in- 
clude " probable earning capacity . . . and operating 
expenses '' in the items '' to be given such weight as may 
be just and right in each case ? " ^ This was " precisely 
the rule '' for which Mr. Moore of the Kansas City 
Southern contended.* 

1 154 U. S. 439. 

In the Express cases the Court defined value in terms of the power to produce in- 
come, or for the purposes of sale. 166 U. S. 185. 

' Kansas City Southern Brief, p. 107. The Brief further declares: 

" The principles which determine the valuation of the business of the corner grocery 
store . . . are the same as those which determine the valuation of railway properties. 
The ultimate question is what the property may reasonably be expected to produce in 
the way of profits. . . . The experts in this case have done nothing more than to apply 
these plain simple rules to the determination of the value of the properties of the carrier." 

' See A., B. & A. Brief, pp. 22, 26. The Texas Midland Brief, altho quoting the rule 
in Smyth v. Ames, nowhere specifically asks for a value determined by any " fixed rule." 
See the typical discussion, pp. 451-468, and especially pp. 457 and 467. In the A., B. & 
A. Brief, Mr. Brantley says: 

" It is obvious that where the amount of earnings is the thing in dispute, earning* 
cannot be capitalized and made the sole measure of value. Notwithstanding the diflS- 
culty of the problem, however, the courts have never departed from the principle that 
value must be determined, nor have they departed from or abandoned any of the funda- 
mental principles for determining values ... in Smyth v. Ames . . . far from departing 
from the principle of market value, the coiu^ distinctly reatfirmed that principle . . . 
earnings must be considered. . . . The Supreme Court in the Missouri Rate cases, 
230 V. S. 74, specifically stated that earnings could be properly considered in reaching 
a conclusion. . . . The difliculty encountered by the Supreme Court was the extent 
to which they co\ild consider income and market value." Pp. 26, 27. 

* Hearings, October, 1918, p. 33; compare discussion by Mr. Moore, ibid., p. 7. 
Mr. Farrell, ibid., p. 18, stated that he had come to a conclusion which in substance cor-> 
responds with that expressed in Railroad Valuation, p. 18: 

" I have come to the conclusion that what Mr. Justice Harlan had in mind when he 
wrote that opinion was this, that after having fixed the value in a rate case the tribunal. 



93 

The course of the argument is in the following terms. 
The carrier's net earnings for the year ending June 30, 
1914, capitalized at 6 per cent amounted to $58,587,- 
933.^ Now, if it were known with '' absolute certainty " 
that these earnings would continue constant, '' then 
it could be said without fear of contradiction that the 
properties of the carrier, upon a 6 per cent basis were 
worth that capitahzed amount." ^ But there is no such 
assurance of constancy, and the continuance of the 1914 
earnings, and their probable future increase or decrease 
must be considered in order to arrive at ^^ an intelHgent 
determination of value/' ^ So, if future earnings are to 
decrease, is it not ^^ absolutely definite and certain " 
that the enterprise will be worth " materially and sub- 
stantially less than the amount of its capitalized net 
earnings at the time assumed ? " ^ And is not the con- 
verse true ? Two expert calculations, based upon 
prophecy of the future increased earnings, showed pres- 

for the purpose of determining whether its rates are reasonable, must observe how much 
gross the carrier will earn upon that value with particular rates prescribed, take out of 
that the sum required to meet operating expenses, in order that it may also observe how 
much then will be left, and how much per cent that will be upon the value of the prop- 
erty." 

The Express Company cases (Adams Express Co. v. Ohio State Auditor) rose out 
of a tax law providing that the entire value of the express companies, both tangible and 
intangible, should be ascertained, and that there should be assessed in Ohio the propor- 
tion of this entire value ascertained upon a mileage proportion — an assessment greater 
than the " physical values " within the state. 166 U. S. 185. 

Mr. S. W. Moore, the carrier's solicitor, speaking at the October, 1918, Hearings, 
quoted the Express Company cases at length concluding with the paragraph: 

" The value which property bears in the market, the amount for which its stock can 
be bought and sold, is the real value. Business men do not pay cash for property in 
moonshine or dreamland. They buy and pay for that which is of value in its power to 
produce income or lor purposes of sale." Pp. 4, 5. 

> Kansas City Southern Brief, p. 98. 

2 Ibid. The Brief continues: 

" They would be worth that to an investor for purposes of income and for purposes 
of sale. They would also be worth that in the markets of the world. They would be 
equivalent to a bond in that sum nmning indefinitely in the future bearing 6 per cent 
interest from date." 

» Ibid., p. 99. 

* Ibid., pp. 102, 103. The figures presented (including both those which assiuned a 
futiu"e decline in earnings, as well as those assuming a future increase) were based upon 
calculations seeking to apply the following rule: 

" The value of a thing is measxired by the sum of the amoimts expected to be re- 
ceived from it, discoimted to the time of expected receipt." P. 80. 



94 

ent value figures of $82,593,184 and $74,274,453, the 
difference being due to the difference in the rate of in- 
crease assumed.^ Moreover, the average market value 
of the outstanding securities during the five years pre- 
ceding valuation date (a period during which the wit- 
nesses asserted the prices of seciu-ities had been " unduly- 
depressed '0 amounted to $62,173,595, " the one in- 
ference to be drawn being that the true value of the 
properties was in excess of that sum,'' ^ altho value is 
elsewhere defined in terms of the market. 

In answer to the assertion that " if the value depends 
upon the earnings, in turn the earnings depend upon the 
value, and so you are going around in a circle," ^ it was 
urged that a presumption of reasonableness attaching 
to the existing rates avoided this difficulty.^ It was even 
" confidently " asserted that the law which required the 
Commission to estabhsh and maintain reasonable rates 
" effectively " prevented the reduction of the existing 
schedules. ^ ' ' Any reasonably informed and experienced 

1 The Brief says: 

" The weight to be attached to the foregoing computations made with respect to the 
projections of future net earnings as estimated by Mr. Wymond and Mr. Kinnear, 
obviously depends upon the accuracy of their estimates, and this in turn, involves a 
matter of judgment upon which they have given their expert opinion. Is this not, after 
all, merely the application to the valuation of railway properties of the methods and 
processes ordinarily employed in everyday affairs in arriving at the value of any industry 
or any commercial enterprise ? " Pp. 107, lOS. 

' Ibid., pp. 123, 124; the Texas Midland Brief, p. 11, rejects the market value of 
securities on the grovmd of fluctuation. 

' Hearings, October, 1918, p. 9. See the argument, based upon the vicious circle. 
Reply Brief of Messrs. Benton and Farrell, pp. 88-97, an adequate answer to the carrier 
contention. 

* Kansas City Southern Brief, p. 88. The Texas Midland Brief, without developing 
an argument based upon the premises, states (p. 457): " Legally established schedules 
of rates are prima facie reasonable. One who asserts the contrary has the burden of 
proof." The Kansas City Southern Brief, says (p. 89) : " Here we are not only aided by 
the presumption arising from the fact that nearly all of the rates in question were fixed 
or approved by an administrative body charged with the duty of making rates, but there 
was introduced at the hearing aflfirmatave testimony in support of their reasonableness. 
Are we not warranted, therefore, in asserting that their reasonableness has been estab- 
lished in this case, particxJarly in the absence of any countervailing testimony offered 
by our adversaries ? " 

In his dissent Coromissioner Daniels denies that any binding presumption of reason- 
ableness attaches to existing rat€s. The point is not discussed in the majority opinion. 
Kansas City Southern, 1 Val. Rep. 223, 271. » Kansas City Southern Brief, p. 90. 



95 

business man ready, able, and willing to invest his 
money in the property would so conclude/' ^ — And 
why ? Because the general rate structure into which 
the Kansas City Southern schedules were adjusted, 
could not, it was assumed, '^ be further reduced without 
injuriously affecting some members of the group com- 
posed of the carrier and its foiu* competitors, and thus 
becoming unreasonable as to them.'' ^ The value of the 
Kansas City Southern is to be determined by the cap- 
itaUzation of earnings because competitors less advan- 
tageously circumstanced could not, under lower rates, 
earn a reasonable return.^ But how is the " reasonable 
return " of the competitors to be measured ? No clear 
statement appears. But a " value " representing a 
capitalization of earnings is proposed: '^ at the valua- 
tion shown by the capitahzation of net earnings for that 
period, the rates were barely compensatory, and sub- 
stantially less than reasonable rates." * Accordingly 

1 1 Val. Rep. 94. 

* Kansas City Southern Brief, p. 91; an argiunent along these lines is hinted, but 
not developed. A., B. & A. Brief, p. 29. This argument also Commissioner Daniels 
discusses, Kansas City Southern, 1 Val. Rep. 223, 271, 272. 

' The authority for this " principle " is Judge Trieber, who in the Arkansas Rate 
cases, 187 Fed. 290, stated " in clear and concise language " what the attorneys for 
Kansas City Southern conceived to be " the common and accepted judgment of business 
men upon the subject." Brief, pp. 70-73. At p. 117 the Brief further says: 

" The carrier is justly entitled to its advantages arising from its large volume of 
biisiness and its low operating cost. Provided only that its rates for each individual 
service are reasonable in themselves, its profits which arise from the greater volume of 
its traffic are legitimate profits and should be taken into consideration in the deter- 
mination of value." In support, Cotting v. Goddard, 183 U. S. 79, a stockyards case 
is cited. 

* Kansas City Southern Brief, 92: 

" The scale of rates in effect on valuation date jdelded the Cotton Belt a 6 per cent 
return on but $22,567 per mile, and the Missouri, Kansas & Texas upon $31,476 per 
mile. If the values of those two railroads on valuation date are fairly represented by 
those amounts respectively, then, as to them, the rates were barely compensatory, 
which is substantially less than rates which are reasonable." 

The four competitors are the St. Louis, Iron Moimtain & Southern, the St. Louis & • 
San Francisco, the St. Loviis Southwestern (Cotton Belt) and the Missouri, Kansas, & 
Texas. 

It was asserted, building upon Mr. Prouty's language in the Eastern Advance case, 
that the return to the railroad presented a different problem from the return to a local 
public utility, a gas or water plant, since a " differential " appeared in competitive opera- 
tions which could not appear in the earnings of a monopolistic local utility. See the 
discussion, Texas Midland Brief, p. 458; and Kansas City Southern Brief, pp. 44-49. 



96 

it is suggested that the rates should be increased, altho 
for the purpose of the argument it is sufficient to prove 
that the existing scale cannot be further reduced — a 
fact ^' abundantly established '' by the " foregoing com- 
putations.'^ ^ 

The problem presented in these terms and the essen- 
tials of the argument are not new.^ The difficulty arises 
from the failure to recognize that there is no single rate 
of return which can be labeled as " reasonable " and 
apphed to all carriers alike.^ The same premise is 
fundamental in the argument which asserts that the 
railroad surplus presumably represents the results of 
exploitation.^ But the premise is fallacious: 

Existing railroads do not represent the same exercise of judgment 
in original planning, the same efficiency in creating and maintaining 

1 Kansas City Southern Brief, p. 93. Mr. Untermeyer has said: 
" If you should reduce our rates, all the rates in that territory, so that we could get 
6 per cent and our competitors get nothing, we could not claim that the rate was con- 
fiscatory, but you could not reduce the rate as to us without reducing it as to them, and 
they could claim it is confiscatory." Hearings, October, 1918, p. 35. 

But if the value is dependent upon earnings, it would seem that the road with no net 
earnings would have no value, upon the same basis that the value of the Kansas City 
Southern would be shrunk. The argument is ingenious and plausible, but it does not 
avoid the vicious circle which would measure value by the capitalization of earnings 
which themselves are to be measured in terms of that value. 

* See Railroad Valuation, pp. 150-153, 202-205, and the references there cited, 
especially S. O. Dunn, American Transportation Question, p. 93 and following. 

» Ibid. The omission of analysis is not limited to the carrier interests alone, as is 
indicated by the following statement of Mr. Farrell: 

" It might be true that if you had determined the amount of money upon which a 
particular railroad had a right to a fair retixrn, you would find that the company was in 
fact obtaining a net return which was more than a fair return upon that amount of 
money; and it might further be true that in view of some of the conditions which 
existed in the same geiieral territory you would think best to allow that carrier to con- 
tinue to earn more than a fair return. But that would be the good luck of that carrier, 
and not its constitutional or other legal right. That is the point I make. When people 
claim that they have a constitutional right to more than a fair return becaiise of the con- 
dition of some other carrier, then I say that no such right exists." Hearings, December, 
1917, p. 127. 

The idea of the fair return as a single rate is inherent also in the basis of the following 
statement of Mr. Farrell: 

" If they did use poor judgment in locating a raUroad the cost might be $1,000,000, 
but they might not be able to earn, as a matter of fact, might not have a right to earn on 
more than $500,000, simply because they could not do so without exacting unreasonable 
rates." Hearings, March, 1917, p. 427. 

Compare Mr. Samuel Untermeyer's discussion, ibid., October, 1918, p. 34 

* Railroad Valuation, pp. 171-173. See also the discussion of " unproductive im- 
provements," pp. 195-198, and Texas Midland Brief, pp. 312, 313. 



97 

an organization, in establishing relations with shippers and pas- 
sengers, in solving operating problems. Clearly focused are seen the 
forces which make for the differential element in business profits. 
The mode in which this differential accrues to the better located, 
better managed roads can be readily indicated. Location is impor- 
tant from two points of view: from that of ability to secure large 
gross earnings, and from that of economical transportation of the 
traffic secured. The latter refers simply to the physical character- 
istics: to strategic location in a river gorge, to the possession of a 
water level route — which mean a lower ruHng grade, less curvature, 
and therefore, other things being equal, a larger margin between 
operating expenses and revenue than would be possible were the 
road operated through the hills or mountains. It is the old question 
of the New York Central and the Pennsylvania, the one operating 
through river valleys and along the lake shore, going around the 
mountains, the other cutting through. An extra gain comparable to 
a site rent appears, as a reward for skill in original location — per- 
haps even for the one company having first dared risk the cost of 
building. 

Location has also an important bearing upon the quantity and 
classification of freight transported, and upon the density of the pas- 
senger traffic; and, consequently, upon the amount of the gross 
earnings. ... In the light of the composite nature of the railroad 
return, it would, therefore, appear well-nigh impossible to isolate an 
element of unearned increment.^ 

Under a given schedule of rates, it is almost certain 
that unequal net earnings will accrue to carriers dif- 
ferently circumstanced. The Commission has itself 
recognized that the more fortunate competitor, " when 
its rates had been just and reasonable,'' may accumu- 
late a surplus at the same time generous dividends are 
earned.2 This is in reahty a recognition of the fact that 

» Railroad Valuation, pp. 203, 204. 

The Kansas City Southern Brief compares five railroads with five farms, and seeks 
to show that value is determined upon the same basis: the capitalization of earnings 
(economic rent). Pp. 41, 42. 

2 See paragraph quoted by Mr. Moore, Hearings, October, 1918, p. 5, from the 
Spokane case, 15 I. C. C. 376, 415. The same paragraph is quoted in the Texas Mid- 
land Brief, p. 459. Other cases, quoted to show that the Commission has held to the 
rule that " the entire situation " shoiild be canvassed are quoted, pp. 459-467. Re- 
ceivers & Shippers Ass'n of Cincinnati v. C, N. O. & T. P., 18 I. C. C. 440; Com'l Club 
of Salt Lake City v. A., T. & S. F., 19 I. C. C. 218; Superior Com'l Club v. G. N., 
24 I. C. C. 96; Coke Producers, etc. v, B. & O. R. R., 27 I. C. C. 125; Eastern Advance 
case of 1910, 20 I. C. C. 243; The Five Per Cent case, 31 1. C. C. 351. 



the fair rate of return is a variable. But because 
the fair return is looked upon, not as a variable, but as 
a constant to apply to all roads alike, it is insisted that 
the only way to secure a basis upon which to measure 
the reasonableness of the return, is to capitalize the 
earnings on the basis of the rate fixed upon as fair. A 
more obvious example of circular reasoning is hard to 
imagine. 

If, then, the '' value which inheres in a property, and 
which is represented by its productiveness, its profitable- 
ness, its earning power," ^ be rejected as the basis of a 
final value, which, being determined, can be used as a 
measure of reasonableness, what guide shall the Com- 
mission use in its task of fixing the single siun to be set 
in those " further " tentative and final valuations which 
are to be duly issued ?2 Certainly the Act offers no help 
either by way of definition or of formula. Value would 
seem to be one thing, and cost quite another — a " cost 
value " is indeed sui generis: ^ small wonder that Mr. 
Prouty despaired: '^ I would rather undertake to recite 
the Chinese alphabet backward than read the thing 
anyway, because it does not mean anything after you 
have read it." * But " value " is not determinable by 
formula: ^ " The ascertainment of that value is not 

* Mr. Moore, Hearings, October, 1918, p. 9. 
» Texas Midland, 1 Val. Rep. 1, 7. 

' Hearings, March, 1917, p. 411, Mr. George S. Patterson, of counsel for the rail- 
roads: " The contention of the carriers is that under this Act, the Commission is re- 
quired to ascertain one figure representing present value of the property owned or used 
by the carriers; that value means value, and does not mean cost, neither does it mean 
a combination of cost and value." See also A., B. «& A. Brief, p. 395. 

* Hearings, March, 1917, p. 674. These words were spoken after Mr. Prouty had 
served nearly four years as Director of Valuation. Compare his language in the Ad- 
vance case of 1903, 9 I. C. C. 382, 404; quoted and discussed, Railroad Valuation, p. 26. 

* It would seem from statements of Senator La Follette, who sponsored the bill in the 
Senate, that the omission of a " formula " was intentional: " The bill does not under- 
take to direct the Commission as to what relative weight should be given the several 
valuations they are authorized to make." 49 Congressional Record, p. 3797; see also 
pp. 3796, 3802. Mr. La Follette was speaking prior to the Minnesota Rate cases 
opinion. 



99 

controlled by artificial rules. It is not a matter of 
formulas, but there must be a reasonable judgment 
having its basis in a proper consideration of all relevant 
facts/' ^ It would indeed seem that ^' we are sailing on 
an uncharted sea, without a compass to guide us.'' ^ 

" Guides to judgment " have been suggested: " There 
are no cases where the value of a going concern of ade- 
quate capacity has ever been determined to be less than 
the cost of reproduction less depreciation of the used and 
useful property either in a condemnation case or a con- 
fiscation case." ^ On the contrary these cases " fully 
sustain the proposition that the cost of reproduction 
less depreciation is the measure of minimum value of 
any going railroad capable of use to justify such value, 
irrespective of the retiu*n from present value at present 
rates." ^ This assertion is not necessarily inconsistent 

1 230 U. S. 352, 434. (June 9, 1913, slightly over three months after the passage of 
the Valuation Act.) The words quoted in the text are a favorite citation of Mr. Pierce 
Butler. See, for example, Texas Midland Brief, pp. 18, 27, 74, 156, 195, 228, 451, 456, 
468, 797; and Hearings, May, 1915, pp. 107, 112. 

' Mr. Charles Hansel, ibid., March, 1917, p. 817. In the Texas Midland Brief 
(p. 456) it was said: " The ascertainment of value cannot be reduced to formula. It is 
an ultimate fact to be arrived at by a consideration of many other facts and circum- 
stances." At p. 452, it had been said; 

" It seems to us that all efforts to prescribe exact rules for determining what weight 
shall be given by the Commission to any fact or class of evidence necessarily must fail. 
Experienced judgment must be exercised in the light of all the ascertainable facts which 
are required to be foimd and reported. The weight to be given to any such fact or group 
of facts depends upon judgment and the other established facts and circumstances of 
the case." 

» Ibid., p. 75. 

* Ibid., p. 136. This is quoted from the caption of a table in which are listed original 
cost, cost of reproduction new, and less depreciation, and " ascertained vajue " as found 
in sixty-four cases, pp. 136-142. The following (ibid., p. 483) offers a proposed use of the 
reproduction figures: 

" We think it would be proven when the valuations are completed that the present 
earnings of all the carriers in each rate territory taken as a whole will be f oimd to be less 
than a fair return upon the cost of reproduction new of the property used for transporta- 
tion purposes in the territory. If this shall prove to be the fact, then the rates prevailing 
in such rate territory shall be assumed to be horizontally raised by a percentage sufficient 
to produce net earnings of at least 6 per cent upon the total cost of reproduction new of 
all property used for common carrier p\uposes in the rate territory, and the earning 
capacity of the carrier imder such assumed reasonable rates shall be ascertained and re- 
ported in determining value." 



100 

with the claim that ^^ it is true as a general rule that a 
raHroad which was built to meet a reasonable public 
need for its service, which was well located and con- 
structed and which has been properly maintained and 
is in a suitable state of efficiency, is worth more than its 
cost of reproduction new.'' ^ Cost of reproduction less 
depreciation is claimed to set only a miTiimuTn. in any 
case; and further, the carrier would measure reproduc- 
tion less depreciation and cost of reproduction new by 
the same amount (in dollars) since it is claimed that in 
the absence of deferred maintenance there is no depre- 
ciation. The argimaent based on the appeal to authority 
is complete. ^ 

Furthermore did not Justice Hughes, in the Minne- 
sota Rate cases, say that ^' cost of reproduction is of 
service, when it is reasonably applied, and when the 
cost of reproducing the property may be ascertained 
with a proper degree of certainty ? " ^ And is not cost 
of reproduction " a fundamental, tho not necessarily a 
controlling element in value ? " * Mr. Prouty himself 
hgis called " cost of reproduction . . . one and perhaps 

J Texas Midland Brief, p. 397; compare Texas Midland, 1 Val. Rep. 1, 7: 
" The carrier has stated its views ... in oral argument and has fortified its oral 
argument by written briefs, in which it has fully set forth its claim, that, in the instant 
case, reproduction cost new is the sum which is to be stated as value." See Hearings, 
December, 1917, p. 49. 

Mr. Prouty, ibid., December, 1917, referred to the precedents: 
" You have heard of the Consolidated Gas case . . . that valuation was made up 
by taking the cost of reproduction new and including as a part of that, interest during 
construction and all these overheads . . . the same thing was true ia the Knoxville 
Water case . . . the Cedar Rapids case . . . the Des Moines Gas case." P. 82. 

* The following quotation from C, C, C. & St. L. v. Backus is also a favorite: 

" The true value of a line of railroad is something more than an aggregation of the 
values of separate parts of it, operated separately. ... A notable illustration of this 
was in the New York Central RaUroad consolidation." 154 U. S. 439, 444; quoted 
Texas Midland Brief, p, 120; Carrier Valuation Brief of 1915, p. 483; A„ B. & A. Brief, 
p. 400. 

» Mr. Moore, Hearings, October, 1918, p. 9. 

* Report, Railroad Securities Commission, 1911, p. 18. " Eminent railroad men " 
had stated to the Commission " that in their opinion cost of reproduction or physical 
value was the most important single element in determining the true value of the rail- 
road as a whole." 



101 

the most important element in determining fair value," ^ 
while Mr. Farrell (who, presumably, was quaUfied to 
speak for the Bureau of Valuation) has said: " we think 
that the cost of reproduction, properly so-called, may be 
used in estimating the value of common carrier property 
other than lands." ^ But there is nothing in either the 
Texas Midland, Winston-Salem Southbound or Kansas 
City Southern opinions to indicate what weight the 
Commission feels should be given to cost of reproduction 
as a '^ basic fact." ^ Presumably, the Commission is 
reserving a holding upon this point until such time as an 
opinion is called for by the facts of the case before it. 
Such an attitude would be consistent with previous 
policy.^ 

But what should be the place of cost of reproduction 
in the determination of " value " ? It would seem 
probable that the assumed identity of cost of reproduc- 
tion less depreciation and present value is due largely 
to an impUed comparison of the freely reproducible 

1 Eastern Advance case of 1910, 20 I. C. C. 243, 261. The A., B. & A. Brief, p. 64, 
calls " present cost of construction or the cost of reproduction . . . the recognized basic 
factor." 

* Hearings, December, 1917, p. 135. The phrase " properly so-called " refers to the 
Commission's definition of reproduction as contrasted with that proposed by the Minne- 
sota Commission. See discussion, above, p. 11. 

' See for example, Winston-Salem Southbound, 1 Val. Rep. 187, 198. In his 
Memorandum, p. 6, Mr. Prouty said: " This cost of reproduction does not necessarily 
represent the fair value upon which the carrier is entitled to a retiirn, but what it does 
represent is clearly and exactly known." 

Mr. Brantley emphasizes the present tense found in the court opinions, and the 
emphasis on " present value "; A., B. & A. Brief, pp. 49-51, and at p. 65: " present 
value . . . what it would now cost to reproduce it"; and Hearings, December, 1917, 
p. 25: 

" You come down to the question of how you are going to ascertain the value of 
them. Now, if it is cost, it must be the cost measured by the conditions at the time at 
which you ascertain the value. That is so because, in the first place, the Supreme Court 
has, time and again, said it is so. They say it is that property, and not the cost of it, 
which is protected by the Constitution. . . . The value that is involved in a rate case 
is the value at the time of the service. So that if that value is to be predicated upon 
cost, it must be the cost at that time of reproducing the property ... it must be 
present day cost." See Railroad Valuation, pp. 97-102. 

* See Hearings, January, 1917, p. 50. At the December, 1917, Hearings, Mr. Prouty 
addressed the Commission: " As a general rule, when it was possible to do so, you have 
avoided expressing any direct aflarmative approval, as I understand it." P. 142. 



102 

commodity, whose market value tends to approximate 
reproduction cost, and the raihoad which is not freely 
reproducible.^ Surely a man can afford to pay as much 
for a machine already built as he would pay for an exact 
dupUcate. Should not the same rule apply to the 
railroad? The difficulty arises from the unfortunate 
presence of the word " value '^ in the judicial doctrine, 
without definition of the word. In seeking a measiu-e 
of reasonableness, the task is not one of fixing a selling 
price at all, but rather of fixing upon a measure of a part 
of the long run cost of production: the return to the 
investor. There is to be no '' obUteration,'' and if 
calamity should destroy an entire railroad system (so 
that it was not worth while to make new investment, in 
order to reahze on original portions not destroyed) there 
is no assurance of rebuilding. Certainly one can be very 
skeptical that any long headed business man would re- 
produce say the Texas Midland, unless future prospects, 
rather than present returns governed his calculations.^ 
And if cost of reproduction constitutes value, upon 
this alternative theory, should not it apply with equal 
vahdity to land ? Are not the figures reported by the 
Commission obviously incomplete, if cost of reproduc- 
tion, as such, shall measure " value '' ? No figures of 
the cost of reproducing or '^ reacquiring '^ the carrier 
lands have been reported or determined. The Com- 
mission and its Bureau of Valuation, in Mr. FarrelUs 
frank phrase, have made no attempt to comply with the 
requirement of the act in this regard.^ The authority 

1 See Marshall, Principles of Economics, pp. 401, 402, and Railroad Valuation, 
pp. 97-102. 

2 See Texas Midland Brief, p. 24; and Railroad Valuation, p. 99. In the former it is 
stated: " Railroad service is essential to the industrial and commercial interests of each 
such territory, and if the railroads did not exist they would be promptly reproduced." 

3 Brief, Texas Midland Case, p. 47. See A., B. &. A. Brief, pp. 590 and following, 
and Hearings, May, 1915, pp. 104, 114, 120, 131; January, 1916, pp. 146, 147; Decem- 
ber, 1917, p. 96; January, 1917, p. 267. 

In addition to the general responsibility placed upon the Commission to determine 
cost of reproduction, the Act directs an investigation and report of " present value " and 



103 

for this omission is the opinion of the Supreme Court 
in the Minnesota Rate cases: ^ 

The conditions of ownership of the property and the amounts 
which would have to be paid in acquiring the right of way, supposing 
the raikoad to be removed, are wholly beyond reach of any process 
of rational determination. The cost of reproduction method is of 
service in ascertaining the present value of the plant when it is rea- 
sonably appUed and when the cost of reproducing the property may 
be ascertained with a proper degree of certainty. But it does not 
justify the acceptance of results which depend upon mere con- 
jecture.'' 

Because the estimate could be made '^ only upon inad- 
missible assumptions and upon impossible hypotheses," 
as indicated in the paragraph just quoted, the Com- 
mission felt that the " duty to abstain from reporting as 
an ascertained fact that which is incapable of rational 
ascertainment '^ was " clear," ^ ^ holding reiterated in 

" original cost " and " separately the original and present cost of condemnation and 
damages or of purchase in excess of . . . original cost or present value." 

The carrier demand has been that " the mandate of the Congress should be fol- 
lowed," that " the Valuation Act should be obeyed according to its plainest terms." 
Notes and Comments, pp. 21 and 34. The Kansas City Southern brought suit 
against the Commission in the Supreme Court of the District of Columbia, seeking a 
writ of mandamus to require the Commission to investigate and report the " present 
cost of condemnation and damages or purchase " of the right of way and lands. The 
carrier appeal to the United States Supreme Court from the decision of the Supreme 
Court of the District of Columbia was decided March 8, 1920. See Kansas City 
Southern, 1 Val. Rep. 223, 262. i Texas Midland, 1 Val. Rep. 1, 55-61. 

2 230 U. S. 352, 452. See Raikoad Valuation, p. 37; and the Carrier Valuation 
Brief of 1915, pp. 315-370, as there cited. 

To Mr. Brantley's mind, it was " perfectly absurd to suppose that the Supreme 
Court could have condemned a method of ascertaining the cost to reproduce a railroad, 
which had been in use for twenty-five years." He was " amazed and astonished at • . . 
the State Commissions, almost every one of whom had been engaged ... in ascertain- 
ing the cost of reproduction of land." Hearings, January, 1917, p. 314. 

» Texas Midland, 1 Val. Rep. 1, 60. Also: 

"We are unable to distinguish between what is suggested by the carrier in this record, 
and nominally required by the act, and what was condemned by the court as beyond the 
possibility of rational determination." Ibid. 

The carriers proposed the use of the multiple short-cut method for determining cost 
of reproduction, tho the figures presented in the Texas Midland case purported to repre- 
sent expert opinion of the cost of reacqtiiring the land of the railroad, the multiples 
being average figxires, compiled from these data. Texas Midland Brief, pp. 904-907. 

See also Prouty, Memorandum, p. 53, where it is acknowledged that a figure of cost 
of reproducing (reacquiring) lands could be calculated by applying a multiple; but Mr. 
Prouty urged the Commission not to expend the considerable sum which woiild be neces- 
sary to ascertain " a fact most doubtful when ascertained, most productive of dispute 
and litigation when annoimced, and which has been held by the courtof final resort to 
be of no possible value." 



104 

the Kansas City Southern opinion.^ But the Supreme 
Court ordered that the mandate of Congress be obeyed, 
'^as Congress indisputably had the authority to im- 
pose upon the Commission the duty in question/' 
The use to be made of figures purporting to show 
hypothetical cost of reacquiring the land is a subject 
to be considered in a controversy growing out of the 
duty when performed.^ 

Cost of reproduction, moreover, introduces into the 
standard of measurement, a factor quite extraneous to 
the business of furnishing transportation — the effect 
of a shifting level of prices and wages. Already it has 
been asserted that the cost of reproduction based upon 
June 30, 1914 is '^ as much out of date as if . . . made a 
quarter or half a century ago." ^ Certainly if cost of 
reproduction is an end in itself, this objection is a valid 
one, as, indeed, it would seem the Commission has 
recognized."* But it was in terms of investment, of cost, 
that the calculations of enterpriser and investor were 
made; and, in the long run, the reward for investment, 

1 Kansas City Southern, 1 Val. Rep. 223, 258-263. See also the discussion in the 
Texas Midland case, 1 Val. Rep, 1, 62. The Minnesota Rate case is discussed at length, 
Texas Midland Brief, pp. 217-245; Reply Brief, pp. 70, 306 and following; A., B. 
& A. Brief, p. 590 and following. The Kansas City Southern Brief referred to and 
'* adopted " the Texas Midland argument, p. 283. The statement of the carrier stand 
given in the Texas Midland case by the Commission seems an adequate summary of the 
protracted discussion. 

2 United States, ex rel. Kansas City Southern Ry. Co. v. I. C. C, March 8, 1920. 
» Notes and Comments, p. 240; also Texas Midland Reply Brief, p. 108. 

* The Commission met this objection in the Winston-Salem Southbound case by the 
following language: 

" The prices employed by the Bureau of Valuation are not the exact prices which 
were necessarily in effect upon the precise date, Jime 30, 1914, but were fixed with rela- 
tion to that date in such a way as to produce normal prices for periods ranging from 5 to 
10 years prior thereto. The use of such unit prices upon items entering into the cost of 
reproduction of road and equipment (other than land) will permit consideration of the 
carriers upon a uniform basis as to time, so that as the normal trend of prices of material 
and labor may go upward or downward correction factors can readily be applied from 
time to time, as by law required, to the end that all appraisals may be kept to date upon 
a comparable basis." 1 Val. Rep. 187, 192. But see Prouty, Memorandum on 
Final Value, p. 15. 



105 

risk assumption, and the direction of enterprise must be 
met in the case of the raihoad which could justify the 
building. Analyzing the problem in this light, cost of 
reproduction is repudiated as a logical basis by which to 
measure the ^' long run " — the reasonable return. ^ 

But may not cost of reproduction (assuming accu- 
racy) be taken as a rough measure of the investment ? 
Much of the existing plant has been built or acquired 
during the period of price advance, and for such por- 
tions, original cost and cost of reproduction might well 
coincide within reasonable limits of approximation.^ 
But the approach of the Commission has been such as 
to render such coincidence purely accidental. It is 
obvious enough that the governing conditions imposed 
by the hypothesis are generally at variance with the 
conditions which governed actual construction: 

Th£ theoretical reproduction of a railroad, such as is assumed in 
valuation work, is materially different from the original construc- 
tion. ... In theoretical reproduction the property to be constructed 
by the engineer is before his eyes. The topography of the country 
through which the right of way runs can be observed. He knows the 
natural difficulties which will have to be overcome. If rock is found, 
his estimate is based upon cutting through or removing that rock. 
The exact amount of materials above the roadbed is capable of as- 
certainment, and no addition should be made for materials omitted.' 

Moreover many railroads were pioneer enterprises, and 
some even extended into hostile Indian country where 

1 Railroad Valuation, pp. 102-107. 

« This is suggested in the following paragraph from the Texas Midland opinion: 

" While the Commission is not as well informed today as it hopes to be before the 
end of its work, we are prepared to state with considerable confidence that the cost of 
producing and equipping a railroad in most parts of this country on June 30, 1914, was 
a fair average for at least the 20 years preceding. There had been many changes during 
that period. Some prices had advanced while others had declined. The cost of labor had 
somewhat increased, but improved methods tended to offset this increase. On th« 
whole, the 1914 cost was just about an average for those previous years during which the 
great bulk of the railroad property then in use had come into existence." 1 Val. Rep. 1, 
140. 

* Texas Midland, 1 Val. Rep. 1, 25; italics the writer's. 



106 

there were neither roads, nor railroads. ^ And often 
(how often, who can say ?) the most economical con- 
struction program was not employed.^ But quite aside 
from this consideration, which raises questions of igno- 
rance or dishonesty,^ the reproduction hypothesis rep- 
resents a conscious attempt to represent the cost of 
building and equipping the road " as economically as 
possible under existing conditions"^ — "by a single con- 
tinuous impulse." ^ That " the present railroads of this 
coimtry are the product of a process of gradual develop- 
ment," that "the narrow gauge road has passed into 
the standard gauge, the low class into the high class, 
the single track into the double track," that "grades 
have been improved, curves eliminated " — "all this 
is disregarded."^ Present conditions, present methods, 
present sources of materials, present prices; these shall 
govern. There need be no preHminary surveys, there 
are no imcertainties. All other Hues of railroad are con- 
tinued in existence. This railroad once obhterated is in 
existence for the purpose of reproducing its competitor. 
And, to secure imiformity, prices as of June 30, 1914 are 

1 " When the Northern Pacific was constructed no other line of raikoad operated in 
its vicinity over most of the distance; today for a considerable part of the way that line 
is paralleled by the Chicago, Milwaukee & St. Paul. It will be recognized that freight 
for the construction of the Northern Pacific can be handled over this line. 

It was necessary in the building of the Central Pacific to construct expensive wagon 
roads for the purpose of hauling the necessary materials. Today those are highways 
maintained at the public expense and are available. Whenever it would be necessary to 
build a road not in existence, that expense is included in the price." Texas Midland, 
1 Val. Rep. 1, 139. 

* For illustration of extra costs because of change in plans, see Winston-Salem South- 
bound, 1 Val. Rep. 187, 194. Here it was said, p. 195: 

" Obviously it cannot be assumed that in theoretical reproduction of the property 
these contingencies would occur, and no sum should be included in the estimate of cost 
of reproduction new in the valuation, because of such past occiirrences." 

» See Raihoad Valuation, p. 107. 

* Brief of Messrs. Farrell and Benton, Kansas City Southern case, p. 36. See Hear- 
ings, May, 1915, p. 31, for the original discussion of the problem, also Carrier Valuation 
Brief of 1915, pp. 35-39. 

6 Texas Midland, 1 Val. Rep. 1, 115. 

* Ibid. Similarly wooden cars which had been rebuilt with steel imderframes were 
inventoried as tho originally so built. See discussion by Mr. Wells of the Texas Mid- 
land, Hearings, March, 1917, p. 861. 



107 

applied to inventories made as of June 30 of subsequent 
years. For the Winston- Salem Southbound, for ex- 
ample, unit prices determined as of June 30, 1914 are 
used with an inventory of June 30, 1915, together with 
a present value of lands dated June 30, 1915.^ For later 
appraisals the difference in dates is even greater. Fi- 
nally the Commission, to secm^e that imiformity which 
it takes to guarantee comparability, even assumes that 
the credit of all " reproduced'' roads will be the same.^ 
Surely the indictment of cost of reproduction need not 
be carried farther. It is purely an artificial and hy- 
pothetical figure, bearing no real relationship to past 
sacrifices, or present investment.^ And more than this. 

1 1 Val. Rep. 187, 192. See Winston-Salem Brief, p. 12. 

" Our inventories are taken as of different dates, but all prices are applied as of 
June 30, 1914. The first thought was to apply prices as of the date of the inventory in 
each case, but subsequent reflection led to the conclusion that this course could not 
properly be pursued. 

" The railroads of this country are competitive. If the costs which are being produced 
by the application of these prices are to be influential in fixing of rates, they ought to be 
upon some common basis. Without attempting to indicate how far changes in prices 
should affect changes in value, it is manifest that all carriers ought to be, if possible, 
measured by the same standard. 

" The fluctuations in price which have occurred since June 30, 1914, illustrate and 
confirm this view. Many prices, especially of equipment, are today double those of 1914. 
It would, in our view, be manifestly absurd to apply to the Pennsylvania lines between 
Washington and Philadelphia, of which the date of valuation is 1914, prices as of that 
date, while applying to the Baltimore and Ohio, a parallel line constructed at substan- 
tially the same time and developed under the same conditions, the prices of June 30, 
1918, which happens to be the date of its valuation. If a imiform price be applied that 
price can be varied by appropriate factors or otherwise as justice may require." Texas 
Midland, 1 Val. Rep. 1, 139, 140. This answers the objection contained in Kansas City 
Southern Protest, p. 7. 

2 The carriers, in answer to the original query by Director Prouty, had proposed that 
the price basis should be the same for all carriers. Hearings, May, 1915, p. 94; see abo, 
Carrier Valuation Brief of 1915, p. 123 and following. 

In the Texas Midland Reply Brief it is insisted also that land values of 1916 were 
higher than of 1914. These " change of value " were alleged to " render impossible the 
determination of any accurate values " (p. 113). At p. 108, it b said: " The Land Brief 
attempts ... to justify its low values by the claim that, because the carrier made its 
valuation in 1916, the figures then determined reflected certain increases in value." 
See Mr. Newman's Land Brief, pp. 29-37. * Texas Midland, 1 Val. Rep. 1, 115. 

» This is clearly recognized in the Texas Midland opinion, pp. 31, 139. Compare 
Mr. Farrell, in his Texas Midland Brief: 

" If prices of materials now in use have increased, such increase will of course be re- 
flected in the Commission's estimate of cost of reproduction new." P. 35. 

Instances of unit prices alleged to be below actual cost are cited by Durham, 
"Comments ... A., B. & A.," p. 33 (equipment); by Samuel Untermeyer, Hearings, 
October, 1918, p. 28 



108 

When so much is dependent upon " progress of the 
arts/^ both past and future, upon the accuracy, ade- 
quacy, and comparability of data, upon conditions of 
service and maintenance, and finally upon the judgment 
of the subordinate engineer who makes the observation 
on which the figures ultimately depend, it can hardly be 
claimed that the Commission's figures in any sense of the 
word represent approximate accuracy — even upon the 
hypothesis assimaed.^ 

But the Commission has promised to fix upon a single 
figure of '' final value," and the '' basic facts," cost of 
reproduction new, and less depreciation, of plant and 
equipment, the " present value " of land, original cost 
to date (where found as a ''fact"), together with finan- 
cial, traffic and operating data, have been made " final " 
upon the theory that there remains " but the one step 
of deducing from the facts stated the sum to be found." ^ 
The entire lack of comparabihty of these data must be 
readily apparent: gathered upon different hypotheses, 
as of different dates, there is no single coordinating 
factor. The cost of the existing imits, less depreciation, 
what has been here caUed " unimpaired investment," 
has been rejected as speculative by the same men who 
report cost of reproduction as a " fact." Any value, 
based upon the set of '' underlying facts " made final 

* The hypothesis is smnmarized in the syllabiis of the Texas Midland opinion, p. 2, 
as follows: 

" Cost of reproduction new of the common-carrier property ascertained and stated, 
upon the assumed basis of the non-existence of the railroad while all other conditions in 
the same territory were taken as existent on valuation date, that the most practicable 
and economical construction program is employed, and that to an inventory of items 
making up the physical property, shall be applied cost prices fairly representative of 
conditions on valuation date, with the addition of the estimated cost of placing the 
items in position as of valuation date, and including certain overhead charges." 

It would seem that the handling of the second hand units was inconsistent with this 
definition, and especially the cost and freight on the Texas Midland crane. 1 Val. Rep. 
1, 46. 

* Texas Midland, 1 Val. Rep. 1, 6. See discussion, above, pp. 7-10. 



109 

in the preliminary opinions, must be an arbitrary fig- 
m-e, however stated in the opinion of the Commission. 
The very requirements of the Act make this inevitable. 
The Valuation Act is, after all, only an attempt to 
provide the Commission with information concerning 
the elements of '^ fair value '^ listed in the '^ classic " 
statement of Smyth v. Ames: ^ 

In order to ascertain that value the original cost of construction, 
the amount expended in permanent improvements, the amount and 
market value of its bonds and stocks, the present as compared with 
the original cost of construction, the probable earning capacity under 
particular rates prescribed by statute, and the sum required to meet 
operating expenses, are all matters for consideration, and are to be 
given such weight as may be just and right in each case. We do not 
say that there may not be other matters to be regarded in estimating 
the value of the property. What the company is entitled to ask is a 
fair return upon the value of that which it employs for the pubUc 
convenience. On the other hand, what the public is entitled to 
demand is that no more be exacted from it for the use of a public 
highway than the services rendered by it are reasonably worth. ^ 

That this ^^ rule '' — which is, in fact, no rule at all — 
should have been invoked by all parties indicates the 
extent to which the problem of railroad valuation has 
been dominated by that appeal to authority funda- 
mental in legal documents and legal procedure.^ 

The function of the carrier brief in the Texas Midland 
case was frankly stated as a consideration of ^^ the 
principles . . . laid down in decided cases for the guid- 
ance of tribunals charged with the duty of determining 
value." ^ Is not value determination, ^' a judicial ques- 
tion . . . determined as other judicial questions are, 
by the appHcation of the settled rules and established 

1 Texas Midland Brief, p. 75. 

« 169 U.S. 466, 546; quoted Minnesota Rate cases, 230 U.S. 352, 434; analyzed and 
critically discussed in detail, Railroad Valuation, pp. 16-27. 

* See Texas Midland Brief, pp. 27, 75; Aitchison, Brief for the Nat'l Ass'n Ry. 
Com'rs, p. 50; A., B. & A. Brief, pp. 22, 23, 388, 484 and following, a detailed analysis* 

« P. 75. 



no 

principles of jurisprudence ? '^ ^ And so with the defini- 
tion of value: '^ The mere language of commissioners, 
text-writers, economists, valuation engineers and the 
like, especially when not employed with reference to the 
meaning of this Act, is of no consequence, and does not 
require discussion." ^ Only " the decisions of the Su- 
preme Court of the United States, and those of the 
lower courts ... in harmony therewith are binding 
upon the Commission." ^ And yet these final authori- 
ties are themselves vague and uncertain. Surely when 
one finds a ^' general rule " supported by a jumble of 
cases on taxation, condemnation, capitahzation, and 
regulation, he may fairly protest.^ 

It is too early to say that the Commission will not 
fulfil the promise to state single figures of value. It is 
even conceivable that the sum of cost of reproduction 
and the " present value " of land may in some cases be 
so reported.^ But it is not too early to raise the question 
of the real scientific validity of such figures (or any other 
figures reported) when based upon a " judgment " pur- 
porting to consider the irreconcilable totals and elements 
made final in the preliminary opinions. Certainly the 
totals now being published as tentative valuations offer 

^ Kansas City Southern Brief, p, 110. 

* Texas Midland Reply Brief, p. 50; at p. 109, Kansas City Southern Brief, it was 
said: 

" It is to be remembered at all times that the valuation of railway property is a 
judicial question, and not a legislative one. The rules, principles, and methods pointed 
out by the courts must be followed in preference to economic theories or acts of legisla- 
tive bodies." 

» Texas Midland Brief, p. 50. 

* Ibid., pp. 353-467; see also Carrier Valuation Brief of 1915, pp. 479-532. After 
all, what the Railroad Commission of Idaho, or a United States District Judge in Ar- 
kansas, or the Supreme Court of Wisconsin (or even the United States Supreme Court) 
did or said, imder the peculiar facts of a given case, is conclusive of the validity of no 
general principle. An argument in terms of " it has always been recognized," or of 
" this has been so often affirmed, not only by the Courts, but by the Commission itself, 
that the principle can be asserted without contradiction," or of " the foregoing cases 
refute the contention " hardly constitutes analysis of a problem. Texas Midland Brief, 
pp. 354, 379. 

5 See Mr. Prouty's argument, Hearings, January, 1920; and especially his Memo- 
randum on Final Value, p. 4. 



Ill 

no basis for a figure of ^' final value." They represent a 
compliance with a statute, as that statute has been inter- 
preted, but they represent nothing more. The first use of 
the ''rule '^ in Smyth v. Ames was a frank '' guess. " ^ Will 
the Commission in making its final reports speak with 
equal courage ? Or will the Commission take refuge 
behind generality ? It suffices for the present to recog- 
nize that the progress thus far made is not of a character 
to silence the skeptic who has small confidence in the 
conclusiveness or ultimate usefulness of the figures so 
expensively secured and so elaborately presented. 

» C, M. & St. p. V. Tompkins, 90 Fed, 363, 369; Railroad Valxiation, p. 17. 



APPENDIX 



TEXT OF THE VALUATION SECTION (19a) OF THE 
INTERSTATE COMMERCE ACT OF 1913 

That the Commission shall, as hereinafter provided, in- 
vestigate, ascertain, and report the value of all the property- 
owned or used by every common carrier subject to the pro- 
visions of this Act. To enable the Commission to make such 
investigation and report, it is authorized to employ such 
experts and other assistants as may be necessary. The Com- 
mission may appoint examiners who shall have power to ad- 
minister oaths, examine witnesses, and take testimony. The 
Commission shall make an inventory which shall list the prop- 
erty of every common carrier subject to the provisions of this 
Act in detail, and show the value thereof as hereinafter pro- 
vided, and shall classify the physical property, as nearly as 
practicable, in conformity with the classification of expen- 
ditures for road and equipment, as prescribed by the Inter- 
state Commerce Commission. 

First. In such investigation said Commission shall ascer- 
tain and report in detail as to each piece of property owned or 
used by said common carrier for its purposes as a common 
carrier, the original cost to date, the cost of reproduction new, 
the cost of reproduction less depreciation, and an analysis of 
the methods by which these several costs are obtained, and 
the reason for their differences, if any. The Commission shall 
in like manner ascertain and report separately other values, 
and elements of value, if any, of the property of such common 
carrier, and an analysis of the methods of valuation employed, 
and of the reasons for any differences between any such value, 
and each of the foregoing cost values. 

Second. Such investigation and report shall state in detail 
and separately from improvements the original cost of all 

112 



113 

lands, rights of way, and terminals owned or used for the pur- 
poses of a common carrier, and ascertained as of the time of 
dedication to pubhc use, and the present value of the same, 
and separately the original and present cost of condemnation 
and damages or of purchase in excess of such original cost or 
present value. 

Third. Such investigation and report shall show separately 
the property held for purposes other than those of a common 
carrier, and the original cost and present value of the same, 
together with an analysis of the methods of valuation em- 
ployed. 

Fourth. In ascertaining the original cost to date of the 
property of such common carrier the Commission, in addition 
to such other elements as it may deem necessary, shall investi- 
gate and report upon the history and organization of the pres- 
ent and of any previous corporation operating such property; 
upon any increases or decreases of stocks, bonds, or other 
securities, in any reorganization; upon moneys received by 
any such corporation by reason of any issues of stocks, bonds, 
or other securities; upon the S3rndicating, banking, and other 
financial arrangements imder which such issues were made 
and the expense thereof; and upon the net and gross earnings 
of such corporations; and shall also ascertain and report in 
such detail as may be determined by the Commission upon 
the expenditure of all moneys and the purposes for which the 
same were expended. 

Fifth. The Commission shall ascertain and report the 
amount and value of any aid, gift, grant of right of way, 
or donation, made to any such common carrier, or to any 
previous corporation operating such property, by the Gov- 
vernment of the United States or by any State, county or 
municipal government, or by individuals, associations, or 
corporations; and it shall also ascertain and report the grants 
of land to any such common carrier, or any previous corpo- 
ration operating such property, by the Government of the 
United States, or by any State, county, or municipal govern- 
ment, and the amount of money derived from the sale of any 
portion of such grants and the value of the unsold portion 



114 

thereof at the time acquired and at the present time, also, the 
amount and value of any concession and allowance made by- 
such common carrier to the Government of the United States, 
or to any State, county, or municipal government in con- 
sideration of such aid, gift, grant, or donation. 

Except as herein otherwise provided, the Commission shall 
have power to prescribe the method of procedure to be fol- 
lowed in the conduct of the investigation, the form in which 
the results of the valuation shall be submitted, and the classi- 
fication of the elements that constitute the ascertained value, 
and such investigation shall show the value of the property 
of every common carrier as a whole and separately the value 
of its property in each of the several States and Territories 
and the District of Columbia, classified and in detail as herein 
required. 

Such investigation shall be commenced within sixty days 
after approval of this Act and shall be prosecuted with dih- 
gence and thoroughness, and the result thereof reported to 
Congress at the beginning of each regular session thereafter 
until completed. 

Every common carrier subject to the provisions of this Act 
shall furnish to the Commission or its agents from time to- 
time and as the Commission may require maps, profiles, con- 
tracts, reports of engineers, and any other documents, records, 
and papers, or copies of any or all of the same, in aid of such 
investigation and determination of the value of the property 
of said common carrier, and shall grant to all agents of the 
Commission free access to its right of way, its property, and 
its accounts, records, and memoranda whenever and where- 
ever requested by any such duly authorized agent, and every 
common carrier is hereby directed and required to cooperate 
with and aid the Commission in the work of the valuation of 
its property in such further particulars and to such extent as 
the Commission may require and direct, and all rules and 
regulations made by the Commission for the purpose of ad- 
ministering the provisions of this section and section twenty 
of this Act shall have the full force and effect of law. Unless 
otherwise ordered by the Commission, with the reasons there- 



115 

for, the records and data of the Commission shall be open to 
the inspection and examination of the pubHc. 

Upon the completion of the valuation herein provided for 
the Commission shall thereafter in like manner keep itself 
informed of all extensions and improvements or other changes 
in the condition and value of the property of all common car- 
riers, and shall ascertain the value thereof, and shall from 
time to time, revise and correct its valuations, showing such 
revision and correction classified and as a whole and sepa- 
rately in each of the several States and Territories and the 
District of Columbia, which valuation, both original and 
corrected, shall be tentative valuations and shall be reported 
to Congress at the beginning of each regular session. 

To enable the Commission to make such changes and cor- 
rections in its valuations of each class of property, every 
common carrier subject to the provisions of this Act shall 
make such reports and furnish such information as the Com- 
mission may require. 

Whenever the Commission shall have completed the tenta- 
tive valuation of the property of any common carrier, as 
herein directed, and before such valuation shall become final, 
the Commission shall give notice by registered letter to the 
said carrier, the Attorney General of the United States, the 
governor of any State in which the property so valued is 
located, and to such additional parties as the Conomission may 
prescribe, stating the valuation placed upon the several classes 
of property of said carrier, and shall allow thirty days in which 
to file a protest of the same with the Commission. If no pro- 
test is filed within thirty days, said valuation shall become 
final as of the date thereof. 

If notice of protest is filed the Conmaission shall fix a time 
for hearing the same, and shall proceed as promptly as may 
be to hear and consider any matter relative and material 
thereto which may be presented in support of any such protest 
so filed as aforesaid. If after hearing any protest of such ten- 
tative valuation under the provisions of this Act the Com- 
mission shall be of the opinion that its valuation should not 
become final, it shall make such changes as may be necessary, 



116 

and shall issue an order making such corrected tentative 
valuation final as of the date thereof. All final valuations by 
the Commission and the classification thereof shall be pub- 
Hshed and shall be prima facie evidence of the value of the 
property in all proceedings under the Act to regulate com- 
merce as of the date of the fixing thereof, and in all judicial 
proceedings for the enforcement of the Act approved Febru- 
ary fourth, eighteen hundred and eighty-seven, commonly 
known as '' the Act to regulate commerce,'' and the various 
Acts amendatory thereof, and in all judicial proceedings 
brought to enjoin, set aside, annul, or suspend, in whole or in 
part, any order of the Interstate Commerce Commission. 

If upon the trial of any action involving a final value fixed 
by the Commission, evidence shaU be introduced regarding 
such value which is found by the court to be different from 
that offered upon the hearing before the Commission, or ad- 
ditional thereto and substantially affecting said value, the 
court, before proceeding to render judgment shall transmit a 
copy of such evidence to the Commission, and shall stay 
further proceedings in said action for such time as the court 
shall determine from the date of such transmission. Upon 
the receipt of such evidence the Commission shaU consider the 
same and may fix a final value different from the one fixed in 
the first instance, and may alter, modify, amend or rescind 
any order which it has made involving said final value, and 
shaU report its action thereon to said com-t within the time 
fixed by the court. If the Commission shall alter, modify, or 
amend its order, such altered, modified, or amended order 
shall take the place of the original order complained of and 
judgment shaU be rendered thereon as though made by the 
Commission in the first instance. If the original order shall 
not be rescinded or changed by the Commission, judgment 
shall be rendered upon such original order. 

The provisions of this section shaU apply to receivers of 
carriers and operating trustees. In case of failure or refusal on 
the part of any carrier, receiver, or trustee to comply with aU 
the requirements of this section and in the manner prescribed 
by the Commission such carrier, receiver, or trustee shall for- 



117 

feit to the United States the sum of five hundred dollars for 
each such offense and for each and every day of the continu- 
ance of such offense, such forfeitures to be recoverable in the 
same manner as other forfeitures provided for in section six- 
teen of the Act to regulate commerce. 

That the district courts of the United States shall have 
jurisdiction, upon the application of the Attorney General of 
the United States at the request of the Commission, alleging 
a failure to comply with or a violation of any of the provisions 
of this section by any common carrier, to issue a writ or writs 
of mandamus commanding such common carrier to comply 
with the provisions of this section. 

It shall be the duty of every common carrier by railroad 
whose property is being valued under the Act of March first, 
nineteen hundred and thirteen, to transport the engineers, 
field parties, and other employees of the United States who 
are actually engaged in making surveys and other examina- 
tion of the physical property of said carrier necessary to exe- 
cute said Act from point to point on said railroad as may be 
reasonably required by them in the actual discharge of their 
duties; and, also, to move from point to point and store at 
such points as may be reasonably required the cars of the 
United States which are being used to house and maintain 
said employees; and, also, to carry the suppUes necessary to 
maintain said employees and the other property of the United 
States actually used on said railroad in said work of valuation. 
The service above required shall be regarded as a special serv- 
ice and shall be rendered under such forms and regulations 
and for such reasonable compensation as may be prescribed 
by the Interstate Commerce Commission and as will insure an 
accurate record and account of the service rendered by the 
railroad, and such evidence of transportation, biUs of lading, 
and so forth, shall be furnished to the Commission as may 
from time to time be required by the Commission. 



INDEX 



Adjacent land: present value, 52; 
Texas Midland case, 55; repro- 
duction, 55, 65; Minnesota Rate 
cases, 65-78; Kansas City South- 
ern case, 103. 

Aggregate value : Transportation 
Act, 1, 5. 

Analogy: condemnation-regulation, 
89. 

Appreciation: roadbed, 80, 102. 

Average prices: land, 56-60. 

Average units: reproduction, 25. 

Betterments: solidification, 78; 

charged to operating, 80. 
Bureau of Valuation: organization, 

23-25. 

Clearing: original and present con- 
ditions, 17. 

Construction period: hypothesis, 
13; interest, 38. 

Contingencies : engineering pro- 
gram, 19. 

Cost: Fact and estimate, 72; Com- 
mission figures, 76; appraisal, 
81-83. 

Cost of Reproduction, see Repro- 
duction. 

Credit: all carriers ahke, 37, 107. 

Density of traffic: intangible value, 
83. 

Depreciation : deterioration and de- 
preciation, 39-57; deferred main- 
tenance, 45, 52. 

Earnings: capitaHzation, 87; value, 
92. 



Engineering: percentage and syn- 
thetic estimates, 43. 
Experts: overhead, 36; land, 59. 

Final value : Valuation Act, 4, 8, 9. 
Franchise: Value, 84. 

General expense: reproduction, 33. 
Going value: intangible value, 83; 
strategic value, 85. 

Hypothesis, see Reproduction. 

Improvements from earnings : sohd- 

ification and appreciation, 80, 

90. 
Intangibles: considered at length, 

83, 89; subtraction program, 89. 
Interest: during construction, 37- 

39. 

Land: present value, 52; I. C. C. 
method, 54; Texas Midland 
case, 55-58; Cost of reacquiring, 
59-65, 104; Minnesota Rate 
cases, 65, 100; Kansas City 
Southern case, 104. 

Life tables: depreciation, 42. 

Maintenance: as investment, 49. 
Multiple: land, 59-65. 

Obsolesence: fimctional deprecia- 
tion, 40. 

Present value: Smyth v. Ames, 2, 

109. 
Prices: considered at length, 25-32; 

inflation and valuation date, 107. 



118 



119 



Reproduction: hypothesis, 10-22, 
39, 106; as value, 100; invest- 
ment, 105. 

Return: Transportation Act, 1-5. 

Rule : Smyth v. Ames, 109. 

Simple property: depreciation and 

deterioration, 45. 
Smyth V. Ames: rule, 2, 10, 109. 
Solidification: roadbed, 66, 80, 102. 
Strategic value: going value, 85. 
Surplus: Transportation Act, 4; 

competing railroads, 97. 

Ties: replacement and new invest- 
ment, 76. 



Topography: present and original, 

16. 
Traffic density: strategic value, 85. 
Transportation Act: considered at 

length, 1-6. 

Unearned increment: Transporta- 
tion Act, 2; Land, 71; Earnings, 
71. 

Unimpaired investment: definition, 

82. 

Value : to be determined by I. C. C, 

5, 8, 9. 
Vicious Circle: value and earnings, 

94. 



PHINTED AT 
THE HAEVAED UNIVEBSITT 

CAMBBIDGE, MASS., U. 8. A. 



